Third Oil Shock &#=
8211;
Facts and Prospects
In 1973 = and 1979, the oil exporting countries on either side of the Persian Gulf reduced oil supplies to the world, wielding a new political weapon. The so-called weapon did not serve to further any of the avowed political aims – in Palest= ine or elsewhere – but it did open up the coffers of the importing nations for the amassing of spectacular wealth in the Middle East. Much later Russia – today the world’s second largest oil producer – was abl= e to make its political comeback riding on the largesse of oil wealth. Money spe= aks volumes, and oil wealth in no exception. Furthermore, since no particular labour is needed to obtain the largesse, except some self-discipline to maintain shortages in the global market, it inclines non-entities pumped up with the money to feel that fate has singled them out for a divine purpose.= Thus witness the profundities of M/s Ahmedinezad and Chavez.
Oil is a= ddictive – for the consumer and the exporter. It should carry a statutory heal= th warning like cigarettes that would be just as effective, i.e. zero. The exporter is quickly hooked on to the easy money; it spawns corruption and authoritarian= ism. That makes the self-discipline to restrain output to keep the markets sligh= tly under-supplied hard to achieve. Whenever, oil prices have weakened due to s= oft demand conditions, OPEC members have flouted their production quotas. They produced more so as to secure the revenue streams that they had got used to – and the resultant over-supply further weakened price conditions.
The First and Second oil shocks made the exporting nations feel the steroids = rushing through their bloodstream and they lived it up: In the hot spots of the decadent West, the arms bazaar and in grand new palaces. With a few excepti= ons, they chose not to bother to do much else – towards building an econom= y separate from oil.
In the i= mporting nations of the West (and Japan) there was an economic infrastructure that w= as designed to respond to price changes. And it did. Unprecedented technologic= al change swept through the developed world. In Europe and Japan the governmen= ts rightly imposed high taxes on petroleum products to push the process of oil= and general energy conservation forward. Automobile and other engines became in= credibly more efficient.
In 1973 = the OECD countries consumed 41.8 million barrels per day (mb/d) of oil, which was 73= % of the world total. The technological changes that we just spoke about took ti= me to have an impact; and there were some who did not wish to change. In 1979 = OECD oil consumption had risen to 44.4 mb/d. But then the changes kicked in and = with a vengeance. OECD oil consumption began to fall and it was not till 1994 th= at the level of 1979 was reached once again.
However,= to truly appreciate the extent to which technological and usage change compressed demand, one should focus on the European Union and Japan which unlike the U= SA imposed high taxes on petroleum products. In 1973, the 4 major EU economies – Germany, France, Italy and the U.K. consumed 10.3 mb/d; in 1979 this figure had fallen to 9.8 mb/d. Ten years after the Second Oil Shock it was down to 8.1 mb/d and remained at that l= evel till 2005. High prices saw further declines and consumption in 2007 was only 7.8 mb/d. Japan consumed 4.9 mb/d in 1973 and 5.1 mb/d in 1979. Subsequentl= y it fell to below 5.0 mb/d, recovering slightly in the nineties to 5.7 mb/d in 1996. It fell thereafter and in 2007 was less than 5.0 mb/d.
Advanced= nations in Europe and Japan are of course not growing out of poverty. The experienc= e of USA shows how different the experience can be when oil is not subject to hi= gh taxes. In 1973, US consumption was 17.3 mb/d and rose to 18.5 mb/d by 1979. Thereafter higher prices and new automobile engine standards saw demand dro= pping to 17 mb/d and below in the eighties and the first half of the nineties. Thereafter, the collapse of oil prices caused old habits to return and by t= he turn of the century the US was consuming 19.7 mb/d, which rose to 20.7 mb/d= by 2004. Since then higher prices have kept consumption levels unchanged throu= gh 2007, ignoring the substitution of some petro-product consumption by ethanol and other bio-fuels.
Thus, hi= gh prices and higher taxes help societies to move towards more energy efficient use of oil – and that is exactly the way it should be with a resource that is depleting. And this is true for developing economies too. Higher prices and taxes incentivise mass transport and smaller fuel efficient vehicles. An absence of taxation encourages large cars: thus Buicks (and similarly large sized cars) are the norm in Beijing, while small/compact cars are the norm = in Delhi. However, what we gained (including building a successful small car industry at home) through sensibly pricing automotive fuels is being slowly jettisoned over the past few years.
The gove= rnment of the day has permitted itself to be petrified on petroleum pricing policy. By both its own uncertainties about what a sensible policy should look like and the public bullying that the Left has made a daily ritual of. The Left has = made an unhappy spectacle of the UPA government by issuing daily threats – much like a parar mastan or str= eet-corner goon. But to be fair, the articulation of the crazy theory of “three stakeholders”, i.e. no price increase somehow, was the sole invention= of the then Congress petroleum minister.
In Decem= ber 2006 and February 2007, the UPA government cut retail prices in order to show (seemingly to the Left) that its petroleum pricing policy was guided by cru= de oil prices. It was a waste of time, as when crude oil prices rose again thr= ough 2007, the government failed to restore the two price cuts. The suspense of = mantriji frozen into inaction by s= heer fright may feed a horror (or comedy) movie, but is plainly unacceptable in = so far as it affects much larger national interests.
The Indi= an Oil Corporation says it is running out of money. May be it should sell off its investments. Surely, some “stakeholder” will be served in the process. Perhaps some small price increases and higher subsidies will follo= w. It is difficult to see otherwise than an unsatisfactory outcome that is painfu= l to dwell upon.
Much more interesting to me, is what the Thir= d Oil Shock is going to result in globally. Not for nothing did the Saudis play the rol= e of moderator. They had learnt well the lessons of the eighties and nineties. P= ush the price of oil too high and economies respond with technological change t= hat reduces demand for decades to come, the pricing power of oil producers weak= ens and so do prices.
This tim= e around, the bull run on oil price was greatly helped by the (a) sabre rattling on I= ran last year; (b) financial investors going long big time on oil; (c) disarray= in US economic and political management; (d) environmental lobbyists who had froz= en nuclear energy initiatives and moved the debate to issues other than availability; and (e) sharp demand increase out of China and their aggressi= ve move on oil assets in Africa.
The OPEC= has a rift. Indonesia has walked out and the Saudis are trying to cool prices dow= n. But it is unlikely that they will get far. In this confused world, high oil prices look to here to stay. We are going to start hearing less about global warming and much more about new energy initiatives. Whether we want to rema= in frozen in this process, and watch the rest of the world disappear over the horizon is a choice that is entirely up to us.
(The =
author is
Economic Advisor, ICRA)
<end&= gt;
Number o= f words: 1,278
Publi=
shed in
Mail Today, Friday, 30 May 2008
Saumitra Chaudhuri
ICRA Limited
2F, Bldg 8, Tower A
May 28, 2008