Oil
Price Hike Blessing in Disguise
By Gwynne Dyer
26 August, 2004 by
Toronto Star
Some
time this week or next, oil is likely to reach $50 U.S. a barrel for
the first time ever. The price is up by a third since the end of June,
and U.S. prices have set record peaks in all but one of the past 15
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 U.S. dollar.
Even at $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 $20s, but at $50 a barrel they
are actually seeing more money.
It is 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 2 per cent or 3 per cent 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 7 or 8 per cent 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
$100."
If all goes well,
on the other hand, the price could be back down in the low $30s by this
time next year.
But it is unlikely
to see the $20s again.
Ever since 2000,
the Organization of Petroleum Exporting Countries has tried to keep
the price of oil in the $22 to $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
realize 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 $25 to $30 or
even $26 to $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 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 a 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 we may be facing a global temperature rise over the next century
not of 5.8 degrees Celsius (10.6 degrees Fahrenheit), which would be
bad enough, but as much as 10 to 12 degrees C (18 to 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 industrialized
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
Canadian journalist based in London whose articles are published in
45 countries.
Copyright Toronto
Star Newspapers Limited.