Saturday, April 29, 2006

Paul Thomas: Steep oil prices fuelled by an attitude of waste

A friend who has high-powered contacts in government and business circles tells me that, to a person, they believe petrol will hit $2 a litre before Christmas. After the latest hike, economists are already warning of across-the-board price increases and dire consequences for the restaurant and entertainment sectors as households cut back their spending. There are even suggestions that New Zealand's "drive anywhere" lifestyle is under threat.

If it's any consolation, the Poms are no better off. This week, the chairman of BP warned that the price of petrol in Britain would shortly crack the fateful £1 ($2.85) a litre barrier. Rubbing salt into the wound, he went on to reveal that BP is racking up profits of almost $3 billion a month.

Not surprisingly, this announcement triggered accusations of profiteering and demands that these windfall gains be reined in, either by increased taxation or forced price cuts.

The company's defence is that the price of crude oil is being driven by factors outside its control - political instability, nervousness over the standoff with Iran and the activities of hedge funds and speculators trading in the oil markets.

BP also made the point - thereby emphasising the Rubik's cube nature of contemporary capitalism - that the many British pension funds with considerable shareholdings in the company won't be complaining about its profitability.

Because the price of oil has geopolitical as well as economic ramifications, it is an endless source of conspiracy theories and in this day and age most conspiracy theories lead to Washington DC.

Before we blame the Americans yet again, it is worth considering the thesis advanced by Nils Pratley in the Guardian that the price of oil is going through the roof now because it plummeted in the late-1990s.

In 1997, oil was US$10 a barrel and the Economist ran a story headed "Drowning in Oil", predicting that US$5 a barrel wasn't far away. What happened was that oil companies, faced with falling profits and a grim outlook, slashed their investment in exploration and refining capacity.

When demand surged as Asia recovered from its currency crisis, supply couldn't keep pace. In other words, it is simply the law of supply and demand working in the producers' favour. Add Hurricane Katrina, chaos in Iraq and a nuclear face-off and $2-a-litre here we come.

In the United States, the home of cheap petrol, the price is up to US$3 a gallon ($1.25 a litre). As there was a time when US$1 a gallon was regarded as political suicide, it is little wonder the Republican Party is eyeing the mid-term elections with trepidation.

There must now be a distinct possibility that President George Bush - widely regarded as a front-man for the big oil companies and who, according to received wisdom, invaded Iraq at vast cost to secure control of its oil reserves - will be brought undone by the commodity he supposedly serves.

However, it wouldn't have escaped the notice of conspiracy theorists that Bush's response to this crisis was to renew his call for Arctic wildlife reserves to be opened up to drilling.

One of the more interesting commentators on the economics and politics of oil is Edward Luttwak, a senior fellow at the Centre for Strategic and International Studies in Washington.

Originally from Transylvania, Luttwak achieved the desired mix of prominence and notoriety in the late 1960s with his book Coup D'Etat: A Practical Handbook which he compared to a cookbook "in the sense that it aims at enabling any layman equipped with enthusiasm - and the right ingredients - to carry out his own coup".

He was part of the clique of hard-line defence intellectuals who coalesced around the Reagan presidency (and probably claim credit for winning the Cold War) and has an article titled "Three reasons not to bomb Iran - Yet" in the latest neo-con organ Commentary which is a thought-provoking read, whatever your views on the situation.

For more than 20 years Luttwak has been arguing that cheap oil is strategically and environmentally disastrous for the West, therefore the higher the price the better.

He points out that the 1973 Arab oil embargo galvanised the West into a huge drive to conserve energy, including the replacement of old machines and plant with energy-efficient equipment, an unblinking focus on avoiding waste, a worldwide search for alternative sources, and an almost overnight switch to small, fuel-efficient cars.

But when normal service was restored, the investment and political will behind these endeavours dried up and business and the consumer went back to their old wasteful ways. These days, the US doesn't really have a small-car market and 60 per cent of buyers choose sports utilities.

Luttwak argues that by abandoning the joint strategy of conservation and the development of alternatives, the West condemned itself to a future of acute shortages and vicious price increases, the beginning of which we may be witnessing.

As it is, the global economy remains totally dependent on a single, diminishing commodity, much of which is located in the world's most unstable region and controlled by undemocratic and, in some cases, hostile regimes.

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