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Why we (still) need 60 dollars per barrel

The report from the OPEC group of August 18 which notes that « current very high oil prices have had no major impact on world economic growth », the same refrain being chorused by a swathe of employable experts and analysts of major banking and finance players, is no surprise at all to me.

Until and unless oil prices move far above 60 dollars-per-barrel the overall and worldwide economic impact of higher oil prices is pro-growth, notably through ratcheting up the price of other raw materials and primary products. This, together with increased world liquidity due to the ‘mechanical’ relation between higher oil prices and the dollars (and Euros) needed to pay for oil triggers a trickle down of increased spending power in mostly low income primary product exporter countries. In turn, this increased solvent demand can only favor continuing fast industrial growth in the emerging and new industrial countries, and even in the aging OECD ‘postindustrial’ countries. This global macroeconomic trend towards higher economic growth due to higher oil prices is amply confirmed by a single statistic : the huge growth rate of world trade and commerce, running at about 15%-per-year at this time.

Slowly, very slowly the world’s deciders will have to react to another inevitable consequence of higher oil prices, now moving in the 50 – 60 dollars/barrel range. Oil is no longer a free good made available to the aging consumer heartlands of the old Northern countries through threat or persuasion, through princely Saudi largesse or Russian gratitude for the liberty to have 30% unemployment and 40% of its population entirely outside the cash economy, but a vital and hard-to-substitute commodity that is entirely nonrenewable at human timescales, and whose ultimate peak of production is looming ever closer. Higher oil prices drive oil demand, unfortunately or not. The so-called « price elastic response » is either a mirage found in learned economic treatises by spouting professors, or absent until prices surge past 100 dollars-per-barrel when (rather then if) some major oil exporter country falls into its own internal sequence of the war between haves and havenots. Employable experts and talking heads now openly talk of 50 or 60 dollar-per-barrel oil (which is not difficult when the day traded price for WTI is around 49 USD/barrel), but few lard their soundbytes with any reference to global warming and climate change. Beyond 60 dollars-per-barrel, however, it is without question that our most serious and respectable deciders will have a 2-minute landmark speech on Energy Transition added to their stock of teleprompter responses to previously submitted questions that handpicked, trusty journalists spontaneously submit.

Energy Transition means exactly that : moving away from declining and polluting oil and gas, firstly and mostly in the most energy-intense, most energy-wasteful, most polluting societies, nations and economies. In the old and aging OECD countries and without mass immigration by economic boat persons, many would lose 30% to 50% of their present population within 30 or 40 years, on current demographic trends. To a man and woman in the decider elites of hyperconsumption’s heartlands of all kinds – including the biosphere and genetic resources – this would be an unmitigated disaster. These liberals so proud of a continuing laisser-faire flirt with absolute chaos would and do intervene, to generate and renew the stock of greedy consumers. Being flexible, however, they could and can also adopt similar targets, but with shorter timeframes, for Energy Transition. Oil at above 60 dollars/barrel will help steel their reserve and justify a simple set of targets for acting now and continuing to act for Energy Transition : the most oil-greedy nations and societies of the planet can easily obtain a 30% to 50% reduction of their current oil demand per capita within 5 to 10 years.

Almost certainly in the immediate aftermath of G W Bush losing the November 2004 election the upward waltz of interest rates will start, triggered or persuaded by a worldwide stock market crash, itself postponed and held over from 2003 through so-called ‘record oil prices’. This will be the last stand of the New Economy, based on 200-year-old slogans and nostrums, and its chaotic, destructive sibling of so-called ‘globalization’. While of course never admitting it, any employable finance minister or policy analyst holds true to the notion that oil prices can always be brought down to ‘reasonable price levels’, that is the now defunct ‘Opec target’ range of about 22-20 USD/barrel, through a dose of swingeing interest rate hikes. This risible ‘policy’ is unfortunately for its tenants based on complete ignorance of how tight the world oil supply situation is right now, and will become ever more so. The willed-for return to the Happy Times of 1986-99, when a few telephone calls and threats to Saudi princes can ‘inundate the market with crude’ is very likely gone forever. This time around the old medecine will only produce its inevitable and first effect – hyperinflation - and not its second and subsequent target of cheaper oil.

Other more patient, more intelligent, reasoned and explicitly energy saving and energy substituting actions will sooner or later come about, perhaps after the greatest financial and monetary crisis the world has known. Energy economic restructuring of transport, habitat, agriculture and above all lifestyles and expectations are the bullet that has to be bit – rather than bombing runs in ‘recalcitrant’ oil producer countries that do not perform to the standards their production potentials dictate, in the minds of our dictating elites. Action by the emerging non Western superpowers can help towards this goal, assuming their homologue deciders are not lookalikes of the aging Western deciders who have decided only to neglect, ignore and deny the coming crisis.

Andrew Mckillop Former Expert-Policy and programming, Division A-Policy, DG XVII-Energy, European Commission. Its views are not necessarily those of PETROLEUMWORLD.

Editors Note:Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld Editorial articles provided that any such reproduction identify the original source, www.petroleumworld.com and it is done within the fair use as provided for in section 107 of the US Copyright Law
Internet web links to www.petroleumworld.com are appreciated.

Petroleumworld News 08/24/ 04

Copyright © Andrew Mckillop 2004, All rights reserved

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