Michael Meacher MP, writing in the Guardian, says:
… “Growing competition for oil may escalate to something as hot and dangerous as nuclear proliferation”
Writing in response:
NOTHING seems to be pleasing the oil traders. Gordon Brown arguing a case, recently, in front of OPEC countries led to King Abdullah of Saudi Arabia in pumping more oil but, shortly after the price stated rising. On June 24th. the price of a barrel approached $138. Gordon Brown thinks that pumping more oil will lower the price but, as lectured by George Monbiot in the last few days on Cif, this might not necessarily hold true. The reasons are worth looking at.
Saudi Arabia only offered to boost its production output by 200,000 barrels a day, around 0.2% of the world’s current consumption. Worse still, the country’s leaders had already told various foreign grandees concerning their plans in the preceding weeks before Brown’s visit, so oil traders were instantly looking for more.
The world economic picture for oil is important in the context of this discussion. Although Saudi Arabia’s output has risen, it is also known that Nigeria’s has fallen. Insurgents, for example, in the country’s oil-rich delta region attacked an oil pipeline belonging to Chevron and one belonging to Royal Dutch Shell. Both firms have been forced to cut production. It is believed some 300,000 barrels per day has been lost, totally outweighing Saudi Arabia’s gesture.
These types of incidents are placing added pressure on already nervous traders. As we frequently come to hear, the world’s demand for oil has been growing much faster than supply in recent years, leaving minimal spare capacity. A small loss of output can lead to a more than exponential increase in price. Oil markets are sensitive: it calculates potential disruptions at every corner – political tensions over Iran, or the impending hurricane season in the Gulf of Mexico. If King Abdullah really wants to deflate the oil markets by helping the world, he could try announcing an increase in output of a few million barrels a day. That would surely have some impact.
SOMETIMES, politicians deserve sympathy. Gordon Brown, for instance, feels a responsibility in doing something about the price of oil, so they cook up all kinds of schemes in demonstrating an eagerness to take action.
However, economically, the sad fact is that oil is one of those world commodities that is inelastic. In a sense, much of what Brown says and attempts to do becomes futile. He cannot fight the market in its purest form. Our dependence on oil is leading most of the west to a situation where virtually nothing but a reduction in demand will affect the price.
Oil might be controversial from a number of different perspectives and, yet, we have to understand that the earth is not limitless. Essentially, there are finite amounts of fossil fuels to which the world has poked the ground with such vigour, and with many straws. The inevitability is that, one day, the earth will be sucked-dry. We hear regularly now of how oil will peak in the near future.
No amount of subsidy, regulation or coddling up to self-serving autocratic regimes will counter the scarcity argument. It’s our dependence that needs to change. Current political debates and how they are presented, particularly the fixation on price, I believe is very much misguided and unproductive. Intellectual resources should be steered towards a more sensible and pragmatic debate on how our demand for oil can, and should be reduced.
When Brown purports that North Sea oil is the solution to a difficult problem, his rational is so far off the mark, it’s almost laughable with contempt. Government arguments currently being presented are, at best, incomplete. There is the problem, ignored by Government during their protracted screed over oil, which the oil majors themselves are saying poses a serious constraint: there are not enough oil rigs to go around, and it takes a long time for those expensive oil rigs to be built, assuming, that is, that the money is there.
Economic theory suggests, too, that supply and demand has to ‘adjust’. However, that doesn’t imply that we will necessarily witness a steady decrease in price. It could mean that the Laffer curve has shifted and it is now more profitable in leaving a large number of people behind because, arguably, there are more and better profits to be had from fewer people paying more. Oil is collateral profit, even more so as the oil producers seek to maximise from the remaining supplies. Essentially, this is how an efficient capitalist system works.
Gordon Brown’s preponderance over oil merely gives the appearance of action. Offshore drilling, landing a windfall tax on the oil companies or the gas tax holiday, spoken of in certain parts of the world, is all basically the same thing. It doesn’t change the amount of supply available, merely adds convoluted argument to a difficult topic of how does the world find a solution to the high energy prices? Greater efficiency and conservation and how our dependence on oil is reduced will, saliently, be important factors in the future.
On price, though, in Britain, meantime, there is much that the British Government could do given the colossal amount of taxes that are paid to the Treasury. These taxes are numerous and wide ranging, on petroleum companies, as well as what we pay at the pumps. An analysis of fuel taxes clearly shows, in some instances, that double-taxes are being applied when, for instance, taxation is being applied firstly on the levels of oil being produced and then again at the pumps for individual consumers. Surely, given the political sensitivities on prices generally, the government would be willing in allowing an element of fiscal freedom for purposes other than political gain from the electorate on fuel tax.
© Mark Dowe 2008: all rights protected
Reference:
“The era of oil wars”, by Michael Meacher MP
Filed under: World Affairs, climate change | Tagged: capitalism, gordon brown, king abdullah, laffer curve, nigeria, north sea oil, oil demand, oil elasticity, Oil Prices, opec, price theory, saudi arabia, scarcity
