Or, the other hand (Also from Economist, same issue):
Mar 6, 1999
Drowning in oil “WHAT”, sneered Abdurrahman Salim Atiqi, Kuwait's one-time oil minister,
“is the point of producing more oil and selling it for an unguaranteed paper currency?” In
1973, when most people feared that nothing could stop greedy OPEC members from raising
oil prices as much as they chose—though not this newspaper, which forecast an oil glut—the
producers affected to accept western cash for their black bullion out of charity. Now the
long oil-price odyssey seems at an end. Since its peak in 1980, the price has fallen
erratically. It has plunged by half in the past two years alone. In real terms, oil now costs
roughly what it did before 1973. Crude is gushing from the ground at the rate of 66m barrels
a day, half as copiously again as in OPEC 's prime. The world is awash with the stuff, and it is
likely to remain so.
That is good news, is it not? For consumers, certainly, especially those in poor countries
whose lives will be improved by the warmth, light and mobility that cheaper energy brings. It
would be progress, too, to get away from the notion that oil is scarce—an assumption that
led to two decades of energy-policy mistakes, such as subsidising coal and nuclear power.
But do not imagine that the bad dream is over. It is worse than ever for some of the world's
most populous and poorest countries that make their living from oil. Petroleum provides over
half the government's income in such places as Iran and Nigeria. OPEC 's oil revenues last
year were, in real terms, only a fifth of their peak in 1980, so most oil producers are beset by
huge budget and current-account deficits. If cash-strapped producers cut expenditure faster
than consumers spend their windfall, the effect of lower oil prices might even be to slow
world economic growth.
Cheap oil could cause instability as well as poverty. As a result of last year's low prices, the
Mexican government has revised its budget three times and increased borrowing. Mexico is
hardly a paragon of good government, but, thanks to the diversification of its economy since
the 1980s, it at least has an alternative to oil. Many other oil-producing countries are
ill-placed to cope with low prices. Cheap oil might merely aggravate the twin evils of
corruption and bad government.
No naked flames, please
The bigger fear is that consumers will one day suffer, too. Hydrocarbons and political
volatility seem to go together. The Middle East has the world's cheapest and most abundant
reserves of high-quality oil. Russia supplies most of Western Europe's natural gas. The
dependence that this implies has been obscured in the past decade because OPEC 's high
prices in the 1970s and 1980s paid for the development of oil and gas fields in such
expensive regions as the North Sea.
But low prices will gradually put most such areas out of business—especially if
cash-strapped Gulf states conclude that the best way to increase revenues is to boost
production, which could drive prices from today's $10 to as little as $5 (see ). The world
will then again depend on a few Middle Eastern countries for half its oil, up from a quarter
now.
At least for the moment, three of these countries—Kuwait, Saudi Arabia and the United
Arab Emirates—are staunch western allies. But Iran and Iraq are not; and the whole of the
Gulf is unstable. All the region's governments are suffering from the decline in the oil price.
Most are repressive and unpopular. None has a sure hold on power.
If the Saudi royal family, in particular, were overthrown, it would send oil markets into
turmoil. Once low prices move more production back to the Middle East, even a toppled
emirate or two might be enough to cause disarray. It is no use hoping that a rebel
government would keep the oil flowing at any cost. Remember the revolution that overthrew
the shah of Iran in 1979. It cut supplies for only a few months—but was enough to trigger
the second oil shock.
Of course, any such shock would be different today. Economies depend less on oil than they
did. The development of markets to trade oil and oil futures means that price signals are
relayed faster and more efficiently. Oil-producing capacity outside OPEC could be brought
back on stream should oil prices ever blip up again. Yet any interruption to oil supplies
would be hugely damaging to the world economy. That is why, even as prices fall,
governments of consuming countries should be guarding against the dangers of oil
dependence.
One way of doing this is to keep researching into alternatives to the petrol-powered internal
combustion engine, such as fuel-cell systems, which can derive hydrogen from natural gas.
Another is to curb consumption through higher petrol taxes. The country best able to make a
difference is America, which consumes a quarter of the world's oil, almost all of it for
transport. American petrol taxes are so low that they do not even take account of
environmental costs such as pollution. There is no better time to perform the politically
awkward feat of raising taxes than when oil prices are low and the money can be quickly
handed back in lower taxes elsewhere.
Yet even this would serve only to mitigate the future risks. By all means, welcome the return
of normality to oil markets and the end of OPEC 's power. But just as oil's scarcity seemed a
fact of life in the 1970s, its abundant flow might be too easily taken for granted today.
Normality could last a while; but it is unwise to assume that it will endure for ever.
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Best,
JS |
