A global thirst will invite a major supply disruption long before it propels the more efficient use of fuel
BY PAUL ROBERTS
Paul Roberts is the author of "The End of Oil: On the Edge of a Perilous New World." This is from The Washington Post.
July 15, 2005
If American motorists seem unpanicked at $60-a-barrel oil, it's understandable. After four years of steadily rising crude prices, the predicted oil crisis hasn't materialized.
Our economy is humming. Gasoline is flowing. We're still buying enormous cars and driving more miles, and most of us couldn't care less that Congress can't reform U.S. energy policy.
Such a blasé attitude is, by conventional economic theory, normal and even healthy. In a free market, consumers respond rationally to prices. When oil really does get costly enough to cause pain, we can depend on market forces to kick in. Demand will fall. We'll buy more efficient cars or develop alternative fuels or start riding bikes or buses. In time, a whole new energy economy will be born - more efficient, perhaps cleaner and certainly less reliant on such worrisome places as Saudi Arabia or Venezuela. Best of all, it will have happened not because Congress bullied Detroit into building wee-little cars but because it made economic sense.
That, at least, has been the guiding theory for U.S. energy policymakers, who since the early 1990s have been more or less content to let markets determine how quickly and in which direction our oil system evolves. When prices get high enough, we'll change.
Until then, there is no crisis: If we don't feel compelled to change, then, by definition, the status quo is fundamentally sound. And all the urgent talk about higher fuel economy standards or programs to brew gasoline from farm crops is misguided and unnecessary. For although $60-a-barrel oil may mean the end of cheap energy, it doesn't mean the end of our current energy paradigm.
There is, however, a less comforting way to look at all this. Even if $60-a-barrel oil isn't high by inflation-adjusted historical standards, it's plenty high enough to indicate a dangerously overheated global supply system.
There are three big reasons oil prices have more than doubled since 2000, and none of them offers any reason to have confidence in the market.
First, demand for oil, in the United States but also in China and India, is rising faster than anyone expected. Indeed, it is rising despite higher prices, in part because we have no easy alternative to oil for transportation.
Second, even as demand rises, supply is strained. The Organization of Petroleum Exporting Countries, Russia and other big exporters are pumping oil at near-maximum capacity. The Saudis try to blame high prices on America's lack of refineries to turn crude into gasoline. But the real problem is a lack of crude to put in those refineries. That's why when OPEC promised recently to pump more oil, the market called the bluff and oil prices rose still higher.
Third, in a market this tight, there is no spare capacity - no extra oil wells, pipelines or tankers that could be brought online quickly in case of supply disruptions. And such disruptions become more probable every day. With few exceptions, nearly every major oil exporter, from Saudi Arabia to Russia to Venezuela, is less politically stable now than it was five years ago - and thus more likely to suffer a crisis that cuts off exports.
With oil at $60 a barrel, traders are essentially betting that a disruption is more likely than it was four years ago, when oil was at $24. They're also betting such a disruption would be more severe because we lack much spare capacity to cushion the blow. Almost any disturbance - new unrest in Venezuela or continued deterioration in Iraq - could easily send prices above $100 a barrel.
Would $100 oil be such a bad thing? After all, it's only when prices get that high that consumers will likely start the move to a post-oil economy. The problem is that such a transition can't happen overnight. Oil isn't just a commodity, like coffee. Oil is fundamental to our economy: It supplies 95 percent of our transportation sector.
We will certainly find an alternative, for we are a clever species. But innovation of that scope takes years to develop, decades to roll out. Even a partial replacement for oil won't be concocted overnight - and certainly not fast enough to avoid one of those monster recessions that has followed every spike in oil prices in the past half-century.
Many conservative economists still insist that price alone is sufficient to bring any transformation. Yet, as the widening gap between domestic consumption and global production now shows, that comforting logic may no longer hold.
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