The daily or weekly fluctuations in the price of a barrel of
crude oil on the New York market are due to a multitude of factors of
very different origin and bearing.
Commentators usually cite OPEC output, the state of American
commercial stocks, the weather, speculators, terrorism, weakness in
refinery capacity, the situation in Iraq, in Iran, in Nigeria, in
Venezuela, in Russia ...
But these "explanations" appear valid whatever the level of the
barrel price - 30 dollars, 40 dollars, 50 dollars... - while we lack
the principal explanation for the level itself, today 60 dollars.
Three decisive factors are pushing the price of crude up permanently:
the geological depletion of conventional oil (inexpensive to
extract), the entry into a world of terrorism and of permanent wars
for the control of oil, the strong increase in demand due to Asian
growth and the maintenance of Western consumption. It's traders'
anticipation of this last factor that heats up the price today.
During the first century and a half of the oil era - from 1859 to
2004 - global demand was always satisfied by the supply. You wanted
more oil? We had margins of maneuver. We would open up the spigots.
More flowed out. We sold more.
The oil shocks of yesterday were political, not economic. Today,
while average global demand in 2005 will border on 84 million barrels
a day (Mb/d), the room for maneuver on the supply side is practically
non-existent.
All the spigots are delivering at their maximum capacity, at the
limit of demand and at the risk that an event (strike, sabotage,
local conflict) reduce supply. A situation of relative shortage
results, pushing prices higher.
As long as the supply does not satisfy demand, the price of oil
will increase until a sufficient number of consumers - there are
billions of them! - adjust their consumption to the possibilities of
their budget. If global supply reaches the limit of 84 million
barrels a day (Mb/d), prices will stabilize at the level necessary
for consumption not to exceed those 84 Mb/d. And when geologic
depletion accentuates, the absolute decline in global supply will
take place at a rate of at least 2% a year. Prices will then have a
tendency to increase still more to exclude more consumers and reduce
consumption.
However, the long oil-dependency of many countries makes me think
that demand will remain strong for vital reasons. The pursuit of
growth and the increase in global population will continue to feed an
increase in demand along the order of 1.5% a year. In fact,
statistics show that oil demand is relatively price-inelastic (unlike
demand for strawberries). In other words, it's not because prices
will increase that demand will decrease.
In 2004, demand grew more than 3.5%, or 2.7 Mb/d - the biggest
increase in twenty-five years - while the average price for a barrel
of oil went from 26 dollars in 2002 to 31 dollars in 2003 and 41
dollars en 2004. From the beginning of 1999 up to the end of 2004,
the price of crude increased 350% and demand 10%, contrary to all
predictions. This phenomenon could almost be called reverse
inelasticity: demand grows while prices increase. Nonetheless, this
surprising "rule" only obtains up to a certain level of prices, for a
moderate speed of increase and over a limited period of high prices.
Another conventional and false belief postulates that high oil
prices slow the economy down. The contrary may be observed: rather
high prices tend to push global growth, which in 2004 was at its
strongest in fifteen years. In effect, while the price of the barrel
rises, considerable volumes of petrodollars received by the oil
companies, both the private ones and especially the nationalized
ones, are recycled into purchases of raw materials, finished
products, or agricultural commodities from countries exporting those
goods, which are different from the oil-exporting countries. Global
commerce grows, involving even certain poor countries which rapidly
transform the proceeds from their sales of raw materials into
purchase of the manufactured goods they lack. These countries do not
save and possess a strong marginal propensity to consume. Any
supplementary revenue is converted into imports of what they don't
have.
This schema applied to the little Asiatic dragons, Singapore,
South Korea, and Taiwan during the 1970s, when oil prices went up by
over 400% between 1973 and 1981. Today it corresponds to the boom in
China, India, Pakistan, and Brazil. Global oil demand is therefore
only slightly linked to the level of crude prices in New York - up to
a certain level and up to a certain speed of increase, at any rate.
An oil shock can, with a time-lag, provoke a slowdown or a
recession in one region of the world and simultaneously stimulate the
economy in another region. It's globalization as a planetary dynamic
that counts, not the energy savings of some Northern countries,
cancelled out by the energy voracity of some emerging countries. In
total, a transfer of Northern countries' energy-intensive activities
to emerging countries joins an increase in global merchandise traffic
to increase total energy consumption. The so-called post-industrial
"knowledge economies" of the OECD rest on a massive transfer of their
material and energetic foundations to "emerging economies."
If prices continue to rise fast for underlying reasons, at 70 or
80 dollars a barrel it is likely that the inflationary consequences
of the oil price rise will be sufficiently marked for the central
bank governors of rich and oil-voracious countries - North America,
Japan, and the European Union - to raise interest rates in an attempt
to contain inflation.
That remedy will only increase the pain, reactivating the pain we
already experienced during the second oil shock of 1979-1983, under
the ultra-liberal impetus of Margaret Thatcher and Ronald Reagan. In
fact, when the cost of money increases, financial markets contract
and businesses have more difficulty financing themselves on the Stock
Exchange or loan markets, which slows down economic activity. When
money is more expensive, everything becomes more expensive, and
inflation increases.
When they attempt to arrest it by a second method, banks print
more money, which provokes the opposite result: more inflation.
Consequently, the method of raising interest rates, supposed to fight
inflation, on the contrary, brings about the contraction of financial
markets, inflation in the cost of money, then of other prices, the
destruction of employment and business difficulties.
Oil is less a final product than a factor of production, often a
small factor in total cost. The consequence of this is that, for the
moment, there are few incentives to substitute for oil or to reduce
demand. Even climatic change and its lethal effects have not
dissuaded the buyer of a 4x4 whose grandmother died in the summer
2003 heat wave.
This relative rigidity will aggravate the seriousness of the
economic and social consequences of the triple shock that is on the
way. Since no one is prepared, it will be grave. Because, this time,
there will be no long return to a reduction in prices, to low-priced
oil products. Inflation is likely to be severe, the recession also.
What I am talking about here is not "the end of oil," but "the
end of cheap oil." That, alas, will be enough to provoke enormous
economic and social instabilities, to dislocate political powers, and
to provoke wars. The misfortune is that, in spite of the warnings
shouted out by some, political and economic leaders have not at all
anticipated the coming situation, as is demonstrated by the
undeserving proposed law on energy orientation adopted by the
National Assembly Wednesday June 23. The shock is inevitable. There
is no plan B. There is only a half-solution - immediate sobriety - to
reduce the devastating impacts of the shock by pushing back a little
its inevitable arrival.
Yves Cochet is a Paris Green Deputy and former Minister for Land
Settlement and the Environment.
Translation: t r u t h o u t French language correspondent Leslie
Thatcher.
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* Origin: [adminz] tech, security, support (192:168/0.2)
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