World must pull head out of sand or face oil shock
www.sundayherald.com THE history of oil prices is a volatile one. The cost of a barrel has rarely remained stable for long and cyclical pricing is part of the industry.
So how concerned should we be that the price of a barrel is likely to break through the $40 barrier for the first time since the Gulf War in 1991? That time, the price of a barrel returned to a reasonable level within weeks of Allied forces invading Iraq. The swift defeat of Saddam's forces put paid to fears of a drawn-out conflict and a wider conflagration across the Middle East. This return to normality was also achieved despite the widespread damage done to Iraqi and Kuwaiti oil assets.
Boom and bust is what the oil industry brings to the economic party. Ever since Edwin Drake drilled the world's first oil well in Pennsylvania back in 1859 and set off a period of excessive drilling that produced a quantity which far exceeded the needs of a limited US market, black gold has witnessed its ups and downs.
As America's appetite for oil grew (domestic oil consumption doubled between 1950 and 1970), the decline of its production business became a fact of life by the early 1970s and the country had to accept that the globe's spare production capacity was in the Middle East. The result of this shift was the rise of the Organisation of Petroleum Exporting Countries (OPEC), which has long sought to control oil prices following the global oil shock of 1973.
The situation last decade when prices were pushed up by a reduction in global oil supplies coupled with growing demand around the world, is ultimately not too disimilar to the one the world finds itself in today.
America's economy has always been partially fuelled by oil, with low prices playing a useful role in keeping inflation, interest rates, and recession, under control. It is also the case that serious spikes in oil prices have historically led to economic downturns. And as US commentators were noting last week, in the past 30 years there has never been a significant move upwards in energy prices that has not been followed by recession.
After Saddam invaded Kuwait in 1990, the price of a barrel more than doubled, briefly hitting $41.15 in October. The result? Recession. And after the leap in 2000, when oil went from $25.50 to a high of $36 within 12 months? Recession. One US economist's recent description of spikes in oil prices as a 'tax on growth' is entirely accurate.
The American economy is just about clinging on. Consumers are spending less and domestic growth is static. Such an economy would struggle to shake off a recession in 2003.
Opec's optimistic members may dismiss fears about price rises as 'psychological' but they can't buck history.
That's perhaps why some industry analysts are beginning to argue that the optimists are just sticking their heads in the sand, hoping the troubles will disappear. And certainly Opec's benchmark of $28 is derived from what remains very much the best possible outcome from any Iraqi conflict.
A quick victory, little collateral damage to either Iraq's oil fields and a rapid return to normality for Venezuela. Opec makes it all sounds so easy. But the great danger for the US economy, and the global economy in turn, is that the potential for damage is ignored, or more likely, underestimated. The oil industry prides itself in being able to factor in all the variables and predict the future. But has the world become a little too complex even for the industry's know-all analysts?
Caution, an old virtue of Scottish business, is needed now. In 2003 no one, unfortunately, has all the answers.
Green words must be matched by investment Last week Tony Blair came up with some noble aspirations about the environment notably that Britain should cut its greenhouse gas emissions by 60% from current levels by 2050. The prime minister did this in an impassioned speech and later in his energy white paper. Unnecessary pollution was fingered as an evil to be rooted out along similar lines to Saddam Hussein.
The paper, already derided by energy insiders as being little more than a 'wish list', was stuffed full of worthy aspirations but gave precious little detail as to how the ambitious targets might be met.
Instead the paper relied on vague promises like improved energy efficiency and use of more renewable sources. But, after what has been described as a bout of cabinet in-fighting, the paper took no steps to keep the nuclear industry alive. That seems perverse as nuclear power is the one proven, large-scale green power source that we have. So why was it condemned to a slow death, taking 25% of carbon-free power capacity to the grave with it?
Conspiracy theorists suspect a plot. They believe Blair's hidden agenda is to prove to the UK population that green energy will ultimately be just too intermittent and unreliable to keep the UK powered-up 24/7, which will enable energy minister Brian Wilson's beloved nuclear to be rebooted, with replacement reactors sanctioned.
There is little doubt that Britons and UK business can be much more efficient in their use of energy, and energy saving is a valid cause to pursue, but in the end it is tinkering around the edges.
At the moment a mere 3% of UK power is generated by renewables, including large-scale hydro projects, and energy insiders believe the targets of 10% by 2010 and 20% by 2020 will prove hard to achieve unless every available stretch of moorland in the UK is to be covered in wind turbines.
Insiders also complain that the paper provided no framework for investment and is therefore unlikely to fuel the use of untried technologies of wave and tidal power.
Jeremy Leggett, chief executive of Solar Century, one of the potential giants in the emerging renewables sector, said after the speech that the £60m pledged to his industry was just one-tenth of the money Blair's government gave to British Energy last autumn to bail out the shareholders of the ailing nuclear industry. It's going to need much much more if it is ever to generate what Blair is hoping it might.