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Deciphering the oil puzzle
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What happens when the demand for oil flattens out or falls and the supply of oil continues as before or actually increases? The answer is economics at its simplest — the price plummets. And that indeed is what has occurred.

All around the world the demand for "black gold" has eased. As oil tankers lie offshore with cargoes unsold, inventories rising and stocks accumulating, American and European oil consumption, and imports, have actually fallen. It is reported that even China, with its recent vast oil thirst, now finds itself overstocked and is trying to ship surpluses back to Europe for resale.

Attempted cutbacks by the Organization of Petroleum Exporting Countries have made little impact. In a matter of months the price of crude oil has more than halved and is still sinking. Of course, all this is in the very short term. What happens next, in the medium term, as reactions to this collapse begin to take hold?

Again, simple economics provides the answer. The suppliers begin to cut back. New wells aren't drilled, new projects are postponed. This, too, is already beginning, as oil giants like Shell and ExxonMobil "re-think" or "postpone" (read: cancel) big new investments in such things as the Canadian tar sands and other ventures, which looked so profitable when oil stood at $140 a barrel and now look very shaky with oil at $55.

On the demand side it is the opposite. With oil suddenly cheaper again, users and consumers start being careless again. All those plans to switch to nonoil energy sources, like wind and solar power, cease to look so attractive and are put to one side for the time being. Official appeals to save energy become — well, less appealing.

In the medium term, with demand rising and supply falling, the inevitable occurs — oil prices soar again, the world panics and we are back in the same old crisis. It has all happened before. Policy planners wondering how to escape this dismal cycle of boom and bust have a perfect model to study and from which to learn.

What that model confirms is that every phase of cheaper oil prices contains the seeds of the next price spike and the next energy shock.

In 1985 the price of oil soared to record heights, similar to those of recent times, and then crashed. By mid-1986 the price of crude had fallen by five times (from $45 to $9). Suddenly no one wanted oil. The oil-producing countries were in despair, their hopes of big spending and lavish lifestyles threatened.

In the oil-consuming countries enthusiasm for energy saving faded, Detroit gave up building compact, economical cars and went back to gas-guzzlers, lights were left blazing, most people forgot about energy efficiency. Alternative energy projects, suddenly looking hopelessly uneconomic, were canceled and in particular almost all plans for nuclear power plants were postponed. Cheap energy seemed back, oil shocks seemed a thing of the past and the warnings were disregarded.

Then, starting in about 2004, the crunch came, intensified this time by the emergence of China and India as super-thirsty oil importers. The oil price climb seemed unstoppable. Dire forecasts talked about $200 or $300 oil. Now all that has once again been swept away in a matter of months .

Is there any escape from this destabilizing cycle, and what lessons can be learned from the past ups and downs?

It is true that last time, in the '80s and '90s, most people in most industrialized countries forgot about energy conservation and alternatives, and carried on drinking up oil and gas. Most but not all. In three countries in particular the lessons were learned, although in different ways, and the focus remained firmly on the longer term.

Those three were Japan, France and Brazil. In Japan, despite the late '80s fall in oil prices the mood remained firmly in favor of cutting oil dependence , increasing energy efficiency and developing alternative energy sources. This meant that Japan came though the oil price cycle with lower imports and a better and more secure energy mix.

In France a different course was taken. With the oil shocks of the '70s and '80s, the French were determined never again to rely totally on Middle East oil, whatever the price. They built in record time a vast fleet of nuclear power stations that today deliver over 70 percent of France's electricity.

In Brazil it was different again. When the oil shocks occurred, Brazil decided, as a matter of long-term policy, to invest as much as possible in biofuel from sugar cane. Its cars were converted and the whole supply chain re-tooled to use this nonoil substitute.

When the world crude price subsequently flopped, many people thought Brazil would be ruined by being locked into a high-cost alternative. But brave policymakers persisted and when the next price spike came, their persistence was vindicated.

What these three stories tell is that now, with oil prices again sliding, wise governments and wise consumers should carry on with longer-term plans. This time round they have an additional incentive to do so, namely the awareness that carbon from fossil fuels is putting the planet in growing danger.

Wise policymakers will therefore do all they can to keep the retail price to the oil and gasoline consumer steady (if necessary by actually raising fuel taxes and cutting out all subsidies) and to sustain longer-term alternative projects through the present phase, including pressing ahead with nuclear power.

Unfortunately that kind of wisdom is in short supply. Most governments are currently mired in financial difficulties and scared of any longer-term policies that might increase the pain and lose votes.

But at least this time the history lessons are there for all to read and it is just possible that some, of not all, government leaders will have the courage to spell out the realities to their electorates and win support for sustained long-term energy strategies. We live in hopes.

by David Howell a former British Cabinet minister and former chairman of the Commons Foreign Affairs Committee. He is now a member of the House of Lords (howelld@parliament.uk www.lordhowell.com)

Source >
  The Japan Times | nov 24

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