10 Oct 08 Eddie's Blog Global

Who benefits from cheap oil?

If this question were asked casually thirty years ago, the answer might have been a simple – everyone.

Today, I think the answer is still simple – no one. Here are my reasons:

One: Climate Change:
Burning oil (gas and coal as well), at a rate of 85.5 million barrels/day releases an explosive quantity of CO2 and other nasties which can’t be reabsorbed into the seas and earth’s surface force the climate to change.

Cheap oil encourages people to use more of it. Cheap oil allows people to drive gas guzzling inefficient cars at little cost to themselves but at huge damage to the environment.

In fact if the US drove cars which are the same size and efficiency as Europe they would meet their Kyoto commitments without doing anything else.

Two: Cheap oil discourages investments in alternatives. If oil had been priced during the 1990’s at, let’s say $50/barrel it is conceivable that the US could have 10% of its electricity coming from wind now instead of 2%. Expensive oil is the driving force for technological innovation. I heard Rick Wagener, Chairman/CEO of GM ask the question “why should GM celebrate a fall in oil prices when it only makes our job of building a hybrid more difficult?”

Three: Cheap oil gives the impression of a semi infinite resource. This couldn’t be farther from the truth. In fact oil from traditional sources has been at its peak of 74 million barrels per day since 2005. We are currently using oil at six times the rate of discovery of new usable reserves. As Matt Simmons said in his seminal work “Twilight in the Desert” if oil were accounted for properly as with other scarce natural resources it would probably be north of $200/barrel.

Four: Cheap oil is an illusion and it leads to bad foreign policy. The argument goes that if only we (in the West) could keep manners on OPEC (by spending fortunes on aircraft carriers into the Gulf and military incursions there) we could induce them to keep the valves open wider and let the oil flow more freely. This kind of thinking is muddled at best. The great Ghawar field has been yielding 5m barrels per day for fifty years and the Saudis are using every kind of inventive technology to get more oil out of it. The other great fields of Sofania and Berri are in decline and no amount of diplomatic pressure can change nature.

Five: The over reliance on cheap oil has led to shocking inequalities between nations. While the West grew rich, there was an unequal dependency created between us and the Middle East. The great founder of the EU Jean Monet who lived through two world wars recognised the inequality in 1956. At the time Europe was 25% dependent on imported oil and he thought this was unacceptable. His thinking gave rise to the great French experiment of making 80% of its electricity from nuclear. (I know as a green I should not celebrate this. However his goals were entirely laudable and humanely conceived).

If the world had acted on Jean Monet’s hypothesis and developed alternatives I truly believe that terrorism would not be what it is today.

Six: The producing nations don’t need or benefit from cheap oil. I would think that like the rest of us they would benefit from stable cash flows. If this were the case they could plan better for their education, housing, roads, diversification programmes. In fact they should aim to keep a stable high price in operation. We have shown that we can survive $125/barrel without imploding our economies. At this level we will see loads of technological innovation and a rather quick turnaround in our ever increasing CO2 emissions.

Our next blog will deal with that most corrosive of economic variables, oil price volatility.