A Blessing in Disguise
By: GWYNNE DYERSOME time this week or next, oil is likely to reach US$50 a barrel for the first time ever.
The price is up by a third since the end of June, and US prices
have set record peaks in all but one of the past fifteen trading
sessions.
This is a Good Thing.
It's certainly a good thing for the oil producers, who have seen
the value of their oil exports eroded by the steady fall in the
value of the US dollar.
Even at US$40 a barrel they were getting no more in real terms
than they were a couple of years ago, when oil was trading in the
high US$20s, but at US$50 a barrel they are actually seeing more
money.
It's less obviously a good thing for everybody else, but the
best things often come in heavy disguise.
This isn't an "oil shock" like 1980, when the price of oil
spiked at the equivalent in today's money of $80 a barrel after the
Iranian revolution, and then slid back down after a year or so.
It is a "demand shock," which is a much more enduring
change.
Thanks mainly to the rapid economic growth of China and India,
there is now a market for every barrel of oil that the producers
can pump.
Future demand is likely to grow faster than future supply for
exactly the same reason.
Most of the growth in the global economy used to happen in the
developed countries, whose economies typically grow at two or three
percent a year.
Last year, almost half the growth happened in developing
nations:China alone added as much demand as the United States, and
India added as much as continental Europe.
Those economies are growing at seven or eight percent annually,
and there is no way that oil production can be expanded fast enough
to keep up.
As a result, oil prices will fluctuate much more wildly than
before.
If Iraqi production is disrupted by the uprising in southern
Iraq, the Deutsche Bank warned recently, "it is not unthinkable
that a second disruption (loss of some exports from Russia, for
example) would push prices towards US$100."
If all goes well, on the other hand, the price could be back
down in the low US$30s by this time next year.
But it is unlikely to see the US$20s again.
Ever since 2000, the Organisation of Petroleum-Exporting
Countries has tried to keep the price of oil in the US$22-US$28
range, cutting production if it fell below that band and increasing
output if it climbed above it.
Now it has been well above that band for six months.
"Our ministers realise they need to revise the price band,
particularly given the changing value of the dollar," said OPEC
spokesman Abdul al-Khereigi last week - and speculated that the new
band would be US$25-US$30 or even US$26-US$32.
The price of oil may never actually fall back that far again,
and even if it does the long-term trend is clearly up.
Why is that a Good Thing?
The main reason is global warming, which is coming on faster and
harder than even the pessimists feared.
In a system as complex as climate, all sorts of things change in
unpredictable ways when you raise the total amount of heat in the
system, and the worst changes are those that set up feedback
mechanisms.
Some of the changes we are observing now are very worrisome.
It was assumed, for example, that the rise in global temperature
would be partly cancelled out by a higher rate of evaporation from
the oceans that produced more cloud cover.
Instead, the higher temperatures seem to be burning the clouds
off.
And recent research suggests that the higher level of carbon
dioxide in the atmosphere is stimulating the bacteria that live in
peat bogs and greatly increasing the speed with which they dissolve
the peat.
The peat is almost pure carbon, and when it dissolves it turns
into - carbon dioxide.
If that turns out to be an runaway feedback loop, we are in
serious trouble, for the peat bogs of the northern hemisphere
contain the equivalent of 70 years' worth of global industrial
emissions of carbon dioxide.
New calculations suggest that we may be facing a global
temperature rise over the next century not of 5,8 degrees
Centigrade (10.6 degrees Fahrenheit), which would be bad enough,
but as much as 10-12 degrees C (18-21 degrees F).
That would be calamitous, but key players in the world of
politics and most of the business world (apart from the insurance
industry) remain in denial.
The Kyoto accord is a good template for the global regulation of
greenhouse gases, but the actual cuts in carbon dioxide production
that it envisages do not begin to address the problem.
The only short-term hope of slowing the rise in temperature is a
steep drop in the use of oil and gas - and the only thing that is
going to make that happen is a steep rise in price.
It has happened before.
Alternative energy sources take a long time to build, but energy
conservation works relatively quickly: the big oil price rises of
the 1970s caused the industrialised countries to bring in energy
conservation measures that cut global oil consumption
drastically.
Twenty-five years of profligacy in energy use since then means
that there is once again huge scope for rapid gains from
conservation.
It will only happen, however, if the oil price goes up and stays
up.
* Gwynne Dyer is a London-based independent journalist whose
articles are published in 45 countries.
This is a Good Thing.It's certainly a good thing for the oil
producers, who have seen the value of their oil exports eroded by
the steady fall in the value of the US dollar.Even at US$40 a
barrel they were getting no more in real terms than they were a
couple of years ago, when oil was trading in the high US$20s, but
at US$50 a barrel they are actually seeing more money.It's less
obviously a good thing for everybody else, but the best things
often come in heavy disguise.This isn't an "oil shock" like 1980,
when the price of oil spiked at the equivalent in today's money of
$80 a barrel after the Iranian revolution, and then slid back down
after a year or so.It is a "demand shock," which is a much more
enduring change.Thanks mainly to the rapid economic growth of China
and India, there is now a market for every barrel of oil that the
producers can pump.Future demand is likely to grow faster than
future supply for exactly the same reason.Most of the growth in the
global economy used to happen in the developed countries, whose
economies typically grow at two or three percent a year.Last year,
almost half the growth happened in developing nations:China alone
added as much demand as the United States, and India added as much
as continental Europe.Those economies are growing at seven or eight
percent annually, and there is no way that oil production can be
expanded fast enough to keep up.As a result, oil prices will
fluctuate much more wildly than before.If Iraqi production is
disrupted by the uprising in southern Iraq, the Deutsche Bank
warned recently, "it is not unthinkable that a second disruption
(loss of some exports from Russia, for example) would push prices
towards US$100."If all goes well, on the other hand, the price
could be back down in the low US$30s by this time next year.But it
is unlikely to see the US$20s again.Ever since 2000, the
Organisation of Petroleum-Exporting Countries has tried to keep the
price of oil in the US$22-US$28 range, cutting production if it
fell below that band and increasing output if it climbed above
it.Now it has been well above that band for six months."Our
ministers realise they need to revise the price band, particularly
given the changing value of the dollar," said OPEC spokesman Abdul
al-Khereigi last week - and speculated that the new band would be
US$25-US$30 or even US$26-US$32.The price of oil may never actually
fall back that far again, and even if it does the long-term trend
is clearly up.Why is that a Good Thing?The main reason is global
warming, which is coming on faster and harder than even the
pessimists feared.In a system as complex as climate, all sorts of
things change in unpredictable ways when you raise the total amount
of heat in the system, and the worst changes are those that set up
feedback mechanisms.Some of the changes we are observing now are
very worrisome.It was assumed, for example, that the rise in global
temperature would be partly cancelled out by a higher rate of
evaporation from the oceans that produced more cloud cover.Instead,
the higher temperatures seem to be burning the clouds off.And
recent research suggests that the higher level of carbon dioxide in
the atmosphere is stimulating the bacteria that live in peat bogs
and greatly increasing the speed with which they dissolve the
peat.The peat is almost pure carbon, and when it dissolves it turns
into - carbon dioxide.If that turns out to be an runaway feedback
loop, we are in serious trouble, for the peat bogs of the northern
hemisphere contain the equivalent of 70 years' worth of global
industrial emissions of carbon dioxide.New calculations suggest
that we may be facing a global temperature rise over the next
century not of 5,8 degrees Centigrade (10.6 degrees Fahrenheit),
which would be bad enough, but as much as 10-12 degrees C (18-21
degrees F).That would be calamitous, but key players in the world
of politics and most of the business world (apart from the
insurance industry) remain in denial.The Kyoto accord is a good
template for the global regulation of greenhouse gases, but the
actual cuts in carbon dioxide production that it envisages do not
begin to address the problem.The only short-term hope of slowing
the rise in temperature is a steep drop in the use of oil and gas -
and the only thing that is going to make that happen is a steep
rise in price.It has happened before.Alternative energy sources
take a long time to build, but energy conservation works relatively
quickly: the big oil price rises of the 1970s caused the
industrialised countries to bring in energy conservation measures
that cut global oil consumption drastically.Twenty-five years of
profligacy in energy use since then means that there is once again
huge scope for rapid gains from conservation.It will only happen,
however, if the oil price goes up and stays up.* Gwynne Dyer is a
London-based independent journalist whose articles are published in
45 countries.