As ministers from the Organisation of Petroleum Exporting Countries (OPEC) prepare to meet pressure is mounting on the 13-nations cartel to download an extra 1.2 million barrels a day on global markets. To be sure, all those concerned keep repeating that oil business has nothing to do with politics. However, with prices hovering around the $100 mark per barrel, the political role that oil plays on the global scene is more apparent than ever.
There was a time, not so long ago, that OPEC was regarded as the arch-villain of international economy, a 13-headed hydra using its deadly claws to squeeze the last ounce of blood out of defenceless consumers. Now, however, many look to OPEC as a potential saviour as the global economy teeters on the edge of stagflation.
The $100 mark has captured the imagination of the world partly because it is the largest figure that many of us common mortals could readily recognise. However, the figure is important for at least two other reasons.
The first is that it shows a shift of speculative energies from the financial products to natural resources. Currency speculators who have burned their fingers playing the dollar against the euro, mortgage lenders still smarting from the sub-prime fiasco, hedge fund wizards whose magic no longer works, and gold barons who have seen the price of the yellow metal stuck at the ceiling, are all looking to oil, and other raw materials, as the substance of their new dreams. Add to all this the troubles that several giant-sized banks are facing and you will see why many investors now see oil as a good mid-term investment proposition.
As the OPEC ministers noted in their most recent conference, there is no objective reason for the current high level of prices.
To start with there is no shortage of supply.
While global oil consumption has been rising at an average annual rate of one million barrels a day, total production capacity has increased by almost three times as much. In other words, there is as much oil as anyone might want. If we add the world’s largely untapped gas reserves, the picture would become even more reassuring (Iran alone is said to have enough reserves of natural gas to meet the European Union’s needs for four centuries!)
There is also no sign of any dramatic increase in demand.
True, China and India still show an unprecedented thirst for oil, a sure sign that their economies are still growing. And, yet, we are far from the projected increases in demand. Partly thanks to energy saving measures and an increased global awareness of climatic change, many nations, including some in the developing world, have succeeded in tempering their demand for crude.
The second reason why the $100 price is important is that it is acting as a powerful engine of inequality across the globe.
The rich nations could afford the $100 peg, or even higher prices – at least in the short run – because they can pass on the extra cost through increases in the price of their exports.
The new emerging economies, that is to say China, India, Brazil and a half dozen other Latin American and Asian states, however, could see their relative economic advantage, partly thanks to lower labour costs, wiped out because of higher oil prices.
China and India are already considering plans to phase out their infra-structural investments, starting with projects related to social welfare. This means that hopes of pulling more people out of poverty are dashed, at least for the time being.
As always, however, the poorest nations will be hit the hardest.
The new oil price wipes out the effects of the recent debt write off supposed to help 13 of the world’s poorest nations. The next 42 in the list of the poorest nations will have to increase public borrowing to foot the additional oil bill.
The third reason why the $100 price is important is that it could throw the economies of the OPEC nations into imbalance.
Yoyo prices are as bad for OPEC as for anyone else, except, perhaps, the speculators.
One effect of yoyo prices is that OPEC nations are unable to develop strategic budgetary policies. Not to so long ago, Saudi Arabia’s public debt rose to almost 150 per cent of its gross domestic product. Now, however, it has fallen to under five per cent.
Ali al-Nuaimi, the veteran Saudi Oil Minister, once observed that both a high price and a low price were dangerous for OPEC. “The only way OPEC can benefit from this trade is to sell oil at the right price,” he said.
But what is the right price? According to Al Nuaimi, the right price is like the right note in music; you recognise it when you hear it though you cannot describe it in advance!
In that sense, $100 is as wrong a price as the $25 in force not so long ago.
The $25 price discouraged investment in finding new oilfields and keeping the existing ones at maximum levels of production. The average barrel of oil put on the market today costs $10 to produce (the industry needs $100 million a day to maintain present production levels.)
If maintained over a certain length of time, the $100 price could make investment in alternative energies profitable. That, in turn, could encourage a long-term switch away from fossil fuels, leaving some OPEC nations with unused resources they cannot cash. This is already happening on a miniature scale with coal mines closed by Margaret Thatcher in Britain almost three decades ago being put back into production. On a potentially bigger scale the revived fortunes of nuclear energy also indicate concern about ever increasing crude oil prices. In the past six weeks alone, nine nations have signed agreements to build nuclear power stations while Britain has announced plans to more than treble its nuclear industry.
A price that is too low will also prevent the OPEC nations from importing goods and services at levels they need to modernise their economies, let alone investing in the economies of their major customers. A price that is too high, on the other hand, could cause recession in major economies, triggering a fall in demand for energy.
Although Hugo Chavez is dreaming of buying the leadership of Latin America with the new windfall, the $100 price is bad for everybody, including OPEC. The only ones to profit from this price are speculators, who practice a modern version of piracy that gives capitalism a bad name.
OPEC could help by maintaining, and if need be, raising present production levels. The major importing nations, notably the United States, could help by a judicious release of their reserves to remove the possibility of any hitch in supplies.
One way of dealing with this artificial situation, however, might be the imposition of a global tax on speculators. The proceeds could go to an international fund to be used to ease oil prices above a certain level.
To insist that because we believe in free markets we should allow buccaneers free rein is either naive or disingenuous. The US and several EU governments are already working on a series of measures to deal with hedge-funds gamblers and speculators who created the sub-prime fiasco. With the same logic, they should also take measures to stop a few thousand individuals from wreaking havoc by playing with oil prices.
OPEC should help by increasing production. But the main consumers of oil should also help by restraining their speculators.