Will Canada get hit with oil costing $60 a barrel?
www.canada.com JAY BRYAN The Gazette Saturday, February 22, 2003
With the price of gasoline and heating oil already at uncomfortable levels, the prospect of an Iraqi war naturally raises the question: how bad can it get?
Pretty bad, but only for a very short time, suggests economist Earl Sweet, who's just finished an analysis whose worst-case scenario sees the price of a barrel of oil spike as high as $60. That compares with a recent price around $36 a barrel and an average in recent years of something like $25.
Perhaps more important, though, Sweet believes that even in this worst case, prices would drop very quickly from their peak to levels at least a little lower than today's.
That's a relief, since a rule of thumb equating a $1 hike in the price of oil (which is priced in U.S. dollars) with approximately a one-cent rise in the cost of a litre of Canadian gasoline suggests that $60 oil could push Montreal gas prices above one dollar a litre.
The $60 scenario assumes that there really is a war and that Iraqi dictator Saddam Hussein responds, as he did in Kuwait a decade ago, by torching Kuwait's oilfields, making it hard for any successor regime to export oil without major reconstruction.
While this scenario is not a forgone conclusion, it is widely considered a plausible one.
The happier news is that Sweet, an assistant chief economist at the Bank of Montreal, thinks there are powerful forces that would begin to cut the price of oil very quickly should a war push it much above $40, much less to $60. How quickly? Perhaps in a matter of days.
That might seem a little surprising if you've been following the news of unusually low oil stockpiles brought by the general strike in Venezuela, a major exporter. But Sweet points out that oil exports from Venezuela are gradually rising, while a number of other factors suggest that any serious shortage will quickly call forth new supplies.
In the short run, the big strategic oil reserves held in the U.S, Europe and Asia are likely to be tapped if oil prices rise above $40, he notes.
More important, the OPEC producers outside of Iraq and Venezuela are already pumping more oil to offset the recent shortfall and still have the capacity to raise production further, potentially offsetting most of any Iraqi production loss. Important oil regions outside of OPEC are also raising production. Russia is the biggest producer, but Canada and Africa are also significant.
Finally, high prices do have an impact on consumption.
But we don't want to depend too much on this impact in the current crunch, because it hits the whole economy, not just energy purchases. While energy efficiency is a very good thing, it is most efficiently gained through long-term policies that specifically target energy.
A spike in the price of oil, on the other hand, won't change people's energy consumption much because they won't buy more-efficient cars or heating systems in response to a temporary condition. Instead, it acts as a tax discouraging all kinds of spending, from new cars to home renovations to business investment, which is a recipe for weaker economic growth.