Thursday, October 21, 2004

Costello warns of an oil price shock

With the election out of the way, the federal treasurer Peter Costello is now warning that high oil prices could harm the economy. Of course, this wasn't mentioned at all throughout the election campaign, not by Costello, not by Howard, not by Latham, nor Crean, the mainstream media didn't mentioned it either... makes you wonder.

In the first two weeks of October, the price of oil rose 10% from $50 a barrel to $55, and that's up from $35 a barrel at the end of June, a rise of 60% in the last quarter. Suddenly, Costello thinks we're heading for a “third oil price shock” and describes it as the “greatest global risk” to the economy.

Not surprisingly, Costello does not mention his government's role in precipitating this threat to the global economy. No mention of the “risk premium” due to the surge in terrorism and deteriorating security in the Persian Gulf, no mention of the loss of two million barrels a day in exports of crude oil from Iraq. No mention of the rampant growth in US demand for oil to meet its soaring military needs.

In a statement that acknowledged a recent sharp decline in growth, a weakening job market and slow business investment, the US Federal Reserve Chairman, Alan Greenspan, admitted “the current situation reflects an increasing fear that existing reserves and productive capacity have become subject to potential geopolitical adversity.

Of course, there are many factors contributing to the relentless climb in oil prices. The weakening US dollar, the ongoing industrial disputes in Venezuela, conflict in Nigeria, uncertainty over the future of Russia's oil major, Yukos, and the recent hurricane damage to offshore production facilities in the Gulf of Mexico all put upward pressure on the price of oil.

There has also been a significant increase in demand due to the rapid growth of US-style, capital and energy intensive industrialisation in the emerging economies of China and India. This trend can be partly attributed to the successful promotion of neoliberal economic theory by western governments and institutions such as the IMF, the World Bank and the WTO.

But the root cause of the spiraling cost of oil is the lack of spare capacity in crude oil production - or more accurately, extraction. The so-called “tight market” is an indication that global oil extraction is nearing its peak and the prospects of future decline in supplies are beginning to spook the market.

The gathering threat of global oil depletion is serious. Among the most vulnerable stakeholders are the advanced industrial economies of the west, which are already deeply indebted and struggling to maintain economic growth. As the price of oil continues to climb, corporate profits will shrink, energy intensive and fuel dependent industries will falter, jobs will be lost and commodity prices will rise.

Clearly, the contemporary paradigm of consumer and investment driven economic growth is fundamentally ill-equipped to deal with the geophysical reality of long term energy decline and the corresponding collapse of the world's industrial economies. Unfortunately, scientific rigour and real world evidence have no place in economic theory.

The high-priests of economic theory are inveterate enviro-skeptics and techno-optimists. Like Alan Greenspan, they give an upbeat and reassuring prognosis that new technologies and the market forces of supply and demand will somehow magically reduce the world's dependence on oil.

And lest there be any doubt about the genius of economic theorists, Greenspan concedes “the risk of more serious negative consequences would intensify if oil prices were to move materially higher.” By describing the inevitable transition to alternative energy as similar to the historic change from wood to coal, or from coal to oil, Greenspan betrays a poor understanding of the real world.

The historical fact is that coal was never replaced by oil, rather it was supplemented by petroleum products, starting from about 1860. At that time, global annual consumption of coal was not much more than a million tons. Since then, the world's population and its energy consumption have increased exponentially.

Today, coal consumption exceeds 5 billion tons a year, in addition to nearly 4 billion tons of oil. There are no vast reserves of concentrated, renewable energies just waiting to be discovered and exploited, nor are there any magical free-energy technologies on the drawing board.

While the gurus of neoliberal capitalism continue to foster the fantasy of limitless resources, perfect knowledge and rational markets, the reality of dwindling oil reserves, fraudulent accounting practices and irrational markets presents western economists with an insurmountable dilemma of their own making.

The only way to avoid a catastrophic economic meltdown is to recognize the fact that fossil fuels are finite, non-renewable resources, that fossil energy consumption, by definition, is unsustainable, and that a fundamental economic rethink and lifestyle changes are required to reduce energy dependence and promote sustainable economies.

This is a problem that's not going away. Politicians really need to get a handle on this issue and start developing policies and setting the agenda in preparation for the transition to a post-petroleum world. The arrival of peak oil, the impending oil crisis and subsequent oil crash will have enormous consequences for politics at all levels of government.

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