[ENVIRONMENT] The Crude logic

here is a puzzle over oil prices - and it is not what is driving them up. That particular question can be answered quickly enough: demand for oil has increased, especially in booming China, and that lift to prices has been intensified by that old culprit, market speculation.

So far, so simple. The real mystery, however, is this: why is expensive oil not changing the way we behave? Throughout this decade, economists have confidently predicted, and politicians have blithely assumed, that costly crude would lead to people consuming less and make greener energy cheaper - and therefore more popular - by comparison. This was not an outlandish argument; indeed it was made by no less a figure than the Nobel prize-winning economist Gary Becker. In an article for Business Week in May 2004, headlined Let's Make Gasoline Prices Even Higher, Mr Becker called for petrol to go up to $2.50 a gallon. That would cut the amount Americans used by about 10%, he thought, and help spark investment in competing technologies such as hydrogen. "General Motors and others believe they can make hydrogen fuel cells competitive with gasoline engines within five to 10 years," he reported.

Spool forward four years. In the US, gasoline is about to hit $3 a gallon, while British motorists are likely to be paying £5 a gallon by this summer. And where Mr Becker predicted oil at $80 a barrel would "derail the world's economy", it is now close to $120. That apocalypse has not come; any derailing has been done not by SUVs, but by SIVs (structured investment vehicles) and other toxic financial products. As for hydrogen cars, far from being just around the corner they still seem like something out of The Jetsons. Greener cars are a long way from taking up anything more than a niche on dealers' forecourts. Why?

Simple, say some: these prices will not last. A lot of sensible folk believe oil cannot remain at $120 a barrel for ever, especially not with the US sinking into recession. Others go further. Mark Spelman, an energy expert at Accenture Consulting, believes that half the current price - $60 - is froth, accounted for either by speculation or general anxiety about how much further crude might rise. Buy Mr Spelman's argument that oil has to fall to around $60 a barrel and you can see that diversifying into greener energy no longer looks so cheap.

There is something in this, but oil at $60 (or $80, another forecast commonly made) is still dear. Prices have been marching steadily upwards throughout this decade and no one expects them to go back to the low point of 1999. Yet those high prices and that extra demand from China, India and other emerging economies are being interpreted by energy companies not as a spur to dive into green substitutes, but as an incentive to go drilling for oil in far-flung places such as the Arctic. That is a highly speculative and extremely costly process too - "We know a whole lot more about the moon than we do about the Arctic," admits one industry expert in the latest issue of Fortune magazine - but it is one that energy companies are more comfortable with. Sure, they will have the odd side experiment in cleaner, greener technology, but will they go, as the advertising slogan puts it, beyond petroleum? Forget about it.

This market is not working as the economists and policy-makers have long assumed. That should not be a surprise; it is a funny kind of market that is dominated by a self-confessed cartel, OPEC and subject to the kind of geopolitical gaming with which we are all familiar. It is surely time for governments to intervene further to drive greener fuel. In Europe this is already happening in a timid, wrong-headed push to include biofuels in petrol. More imaginative options should be tried, as well as some old-fashioned ones: the government must resist the temptation to freeze the fuel-duty escalator beyond this autumn. But it will take more than high pump prices to make us greener.
ENVIRONMENT: Crude logic

Source: The Guardian

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