Fresh from his mauling in the byelection, Gordon Brown met two leaders yesterday. One was the Dalai Lama; the other, Hamad bin Jasim bin Jabir al-Thani, prime minister of oil and gas rich Qatar, may have more influence on the prime minister's chances of political survival.
Brown's spokesman said his boss was "incredibly focused" on oil - little surprise at the end of a week that saw the price of crude rocket to a record $135 a barrel and revived memories of the energy shortages and economic hardship of the 1970s. The memories came flooding back: a seemingly unstoppable rise in the cost of crude; fears that the west would suffer the debilitating combination of rising prices and weak growth known as stagflation; daily comments from the oil cartel OPEC on what it might or might not do to help the developed world out of its fix; demands by British and US leaders that the producers should do more.
Although oil ended yesterday at $132 a barrel, forecasts that crude could soon be changing hands for $150 or even $200 also conjured up images of what life might be like once the cheap oil that has been crucial to the development of modern industrial societies, and is used for everything from food packaging to tourism, runs out.
For the past 10 years or more, the leaders of the G8 countries have concentrated on the problems of the developing world when they gather for their annual summer summit. This year Brown wants oil to be at the top of the agenda and, with every other member apart from oil rich Russia feeling the pinch, he is unlikely to face much opposition. Oil prices are more than six times higher than they were in early 2002, and it took only a fourfold increase in 1973 and 1974 to bring the west's long postwar boom to a shuddering halt. This is the fourth time that oil prices have soared in the past 35 years; on the previous three occasions dearer energy has meant recession.
Graham Turner, of London-based consultancy GFC Economics, said: "Oil prices are on a moon-shoot, with peak oil and a global shortage taking centre stage. Many of the concerns about long term supplies are valid and it is impossible to know how far prices will climb in the coming weeks and months. However, if calls for $150 per barrel are realised by the summer, it will do little to help a world economy struggling with a slide in housing markets across much of the industrialised west."
Opinions differ as to the cause of the recent spectacular rise. Brown blames OPEC. Gerard Lyons, chief economist at Standard Chartered bank, says strong demand from China and India is underpinning prices. Environmentalists say that the world has arrived at a crossroads, when oil reserves start to dwindle from their peak. All these factors have been bandied about for months if not years; last week they were seized upon by energy traders in a speculative frenzy not seen in financial markets since the last days of the dotcom bubble in the late 1990s.
Sushil Wadhwani, a former member of the Bank of England's monetary policy committee who now runs his own hedge fund, said that, as with every bubble, the initial rise in prices was justified - by under-investment by oil companies on exploration, poor output from countries outside the OPEC cartel such as Nigeria, Russia and Mexico, and by strong growth in countries such as India, which has boosted demand for cars. At present oil production of about 86m barrels per day is just enough to meet global demand; by 2050, on some forecasts, demand for crude could have almost doubled to 160m barrels per day.
Absorbed
Few economists doubt that further sharp increases in oil prices - particularly if sustained - would have seriously damaging consequences for the UK and other western economies. The past month has seen the cost of industry's fuel and raw material costs rising by more than 20% - the highest rate since records began in the mid-1980s. Ian McCafferty, chief economist at the CBI, said manufacturers had at first absorbed the cost increases by accepting lower profit margins but the scale of the increase was now so big that firms were starting to pass them on to customers.
Dearer fuel and food has already pushed the government's measure of the cost of living, the consumer prices index, to 3% - a full point above its 2% target and within a whisker of the level at which the Bank of England would have to explain its actions to the Treasury. Fearful of setting off an inflationary spiral, the Bank signalled last week that it is in no mood to cut interest rates, despite signs that house prices are falling, unemployment is rising and retail spending is weak.
Downing Street, too, is concerned: "In the past a rise in the oil price of the sort we have seen recently would have tipped the economy into recession. We are not saying that's going to happen, but the oil price is and will continue to have a big impact on household incomes." The fact that tax accounts for so much of the cost of fuel at the pumps means the impact of rising crude prices has been less marked in Britain than some other countries. Even so, a litre of unleaded is up by about 20p in the last year.
In the medium to long term, Brown believes that high oil prices mean Britain has to look at energy efficiency and diversifying supply. With the oil futures markets indicating that prices will stay at current levels - or even rise - between now and 2015, the economics of alternative sources of energy - including coal and renewables - changes. But in the short term the prime minister's solution has been to turn up the heat on OPEC, which last week was threatening to regain the bogeyman status it had in the 1970s. Brown said: "It is, as people will recognise, a scandal that 40% of the oil is controlled by OPEC, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed and supply needs to expand, that OPEC can withhold supply from the market."
OPEC's response has been to say that the market is adequately supplied with oil and the $35 rise in crude prices since the start of April are purely down to speculation. Peter Odell, professor of international energy studies at Erasmus University in Rotterdam, agreed, saying there is no fundamental mismatch between demand and supply. "At the moment the price depends on what is happening on the trading floor, where they are all on a high."
Wadhwani said pension funds, hedge funds and rich individuals had all been piling in. "We are now at the bubble stage."
If speculators keep driving the price higher, pressure on the G8 to respond will increase. Nick Parsons, head of strategy at NAB Capital, said a deal to support the US dollar would bring the price of crude down. Another option would be for the US and European Union countries to flood the market with oil from reserves. Even so, there were few if any last week willing to predict that the cost of crude would return to the levels seen before the toppling of Saddam Hussein, let alone the sub-$10 a barrel prices that helped create the economic boom of the late 1990s.
'Resource nationalism'
Robin Batchelor, manager of BlackRock's BGF World Energy fund, said: "High oil prices have increased 'resource nationalism' as oil-rich countries demand a larger share of the industry's profits. This has also hit supply as oil majors delay production or pull out of projects altogether. Oil production in Russia, for example, has been falling as the government seizes control of the country's assets, and is flat this year after a decade of sharp growth. Other countries, such as Venezuela, are also experiencing production delays as a result of government intervention."
Economic theory suggests that rising prices encourage rising supplies, but investment in the oil industry is expensive and takes a long time to bear fruit. In the past, oil companies have had their fingers badly burned when prices have crashed and they are wary of over-committing. The International Monetary Fund said the boom has led to higher investment but much of it has been soaked up by shortages of equipment and skilled personnel.
"Oil will increasingly come from unconventional sources, because output has declined from peak levels at conventional fields in many countries, and the size of oilfields is getting smaller on average. This does not mean that the world is about to run out of oil, but it suggests that higher oil prices are needed to induce the additional investment required to balance the market over the medium term."
Turner said it was worrying that the markets ignored the Saudis' announcement that they would pump an additional 300,000 barrels per day. "Saudi Arabia is struggling to stem a long term reversal in production, and any offer to boost output raised the prospect of a steeper drop from 2009, when the decline in global supplies is expected to accelerate. It is perhaps telling that futures prices have climbed even more quickly than the spot market, underlining the very real fears of peak oil."
If the peak oil theories are right, the market frenzy seen this week is likely to return even if prices drop back temporarily when the bubble bursts. "Because the price of oil is particularly vulnerable to global events, it will always be volatile, displaying peaks and troughs like a hospital monitor tracking an irregular heartbeat," said Andrew Simms of the New Economics Foundation.
"What's different today is that there is no way back compared to the price hikes of the 1970s. There are no 'swing producers' to fill the gap. Even the more conservative estimates for the global peak of oil production give us little more than a decade before supplies plateau and begin a long decline."
Brown's spokesman said his boss was "incredibly focused" on oil - little surprise at the end of a week that saw the price of crude rocket to a record $135 a barrel and revived memories of the energy shortages and economic hardship of the 1970s. The memories came flooding back: a seemingly unstoppable rise in the cost of crude; fears that the west would suffer the debilitating combination of rising prices and weak growth known as stagflation; daily comments from the oil cartel OPEC on what it might or might not do to help the developed world out of its fix; demands by British and US leaders that the producers should do more.
Although oil ended yesterday at $132 a barrel, forecasts that crude could soon be changing hands for $150 or even $200 also conjured up images of what life might be like once the cheap oil that has been crucial to the development of modern industrial societies, and is used for everything from food packaging to tourism, runs out.
For the past 10 years or more, the leaders of the G8 countries have concentrated on the problems of the developing world when they gather for their annual summer summit. This year Brown wants oil to be at the top of the agenda and, with every other member apart from oil rich Russia feeling the pinch, he is unlikely to face much opposition. Oil prices are more than six times higher than they were in early 2002, and it took only a fourfold increase in 1973 and 1974 to bring the west's long postwar boom to a shuddering halt. This is the fourth time that oil prices have soared in the past 35 years; on the previous three occasions dearer energy has meant recession.
Graham Turner, of London-based consultancy GFC Economics, said: "Oil prices are on a moon-shoot, with peak oil and a global shortage taking centre stage. Many of the concerns about long term supplies are valid and it is impossible to know how far prices will climb in the coming weeks and months. However, if calls for $150 per barrel are realised by the summer, it will do little to help a world economy struggling with a slide in housing markets across much of the industrialised west."
Opinions differ as to the cause of the recent spectacular rise. Brown blames OPEC. Gerard Lyons, chief economist at Standard Chartered bank, says strong demand from China and India is underpinning prices. Environmentalists say that the world has arrived at a crossroads, when oil reserves start to dwindle from their peak. All these factors have been bandied about for months if not years; last week they were seized upon by energy traders in a speculative frenzy not seen in financial markets since the last days of the dotcom bubble in the late 1990s.
Sushil Wadhwani, a former member of the Bank of England's monetary policy committee who now runs his own hedge fund, said that, as with every bubble, the initial rise in prices was justified - by under-investment by oil companies on exploration, poor output from countries outside the OPEC cartel such as Nigeria, Russia and Mexico, and by strong growth in countries such as India, which has boosted demand for cars. At present oil production of about 86m barrels per day is just enough to meet global demand; by 2050, on some forecasts, demand for crude could have almost doubled to 160m barrels per day.
Absorbed
Few economists doubt that further sharp increases in oil prices - particularly if sustained - would have seriously damaging consequences for the UK and other western economies. The past month has seen the cost of industry's fuel and raw material costs rising by more than 20% - the highest rate since records began in the mid-1980s. Ian McCafferty, chief economist at the CBI, said manufacturers had at first absorbed the cost increases by accepting lower profit margins but the scale of the increase was now so big that firms were starting to pass them on to customers.
Dearer fuel and food has already pushed the government's measure of the cost of living, the consumer prices index, to 3% - a full point above its 2% target and within a whisker of the level at which the Bank of England would have to explain its actions to the Treasury. Fearful of setting off an inflationary spiral, the Bank signalled last week that it is in no mood to cut interest rates, despite signs that house prices are falling, unemployment is rising and retail spending is weak.
Downing Street, too, is concerned: "In the past a rise in the oil price of the sort we have seen recently would have tipped the economy into recession. We are not saying that's going to happen, but the oil price is and will continue to have a big impact on household incomes." The fact that tax accounts for so much of the cost of fuel at the pumps means the impact of rising crude prices has been less marked in Britain than some other countries. Even so, a litre of unleaded is up by about 20p in the last year.
In the medium to long term, Brown believes that high oil prices mean Britain has to look at energy efficiency and diversifying supply. With the oil futures markets indicating that prices will stay at current levels - or even rise - between now and 2015, the economics of alternative sources of energy - including coal and renewables - changes. But in the short term the prime minister's solution has been to turn up the heat on OPEC, which last week was threatening to regain the bogeyman status it had in the 1970s. Brown said: "It is, as people will recognise, a scandal that 40% of the oil is controlled by OPEC, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed and supply needs to expand, that OPEC can withhold supply from the market."
OPEC's response has been to say that the market is adequately supplied with oil and the $35 rise in crude prices since the start of April are purely down to speculation. Peter Odell, professor of international energy studies at Erasmus University in Rotterdam, agreed, saying there is no fundamental mismatch between demand and supply. "At the moment the price depends on what is happening on the trading floor, where they are all on a high."
Wadhwani said pension funds, hedge funds and rich individuals had all been piling in. "We are now at the bubble stage."
If speculators keep driving the price higher, pressure on the G8 to respond will increase. Nick Parsons, head of strategy at NAB Capital, said a deal to support the US dollar would bring the price of crude down. Another option would be for the US and European Union countries to flood the market with oil from reserves. Even so, there were few if any last week willing to predict that the cost of crude would return to the levels seen before the toppling of Saddam Hussein, let alone the sub-$10 a barrel prices that helped create the economic boom of the late 1990s.
'Resource nationalism'
Robin Batchelor, manager of BlackRock's BGF World Energy fund, said: "High oil prices have increased 'resource nationalism' as oil-rich countries demand a larger share of the industry's profits. This has also hit supply as oil majors delay production or pull out of projects altogether. Oil production in Russia, for example, has been falling as the government seizes control of the country's assets, and is flat this year after a decade of sharp growth. Other countries, such as Venezuela, are also experiencing production delays as a result of government intervention."
Economic theory suggests that rising prices encourage rising supplies, but investment in the oil industry is expensive and takes a long time to bear fruit. In the past, oil companies have had their fingers badly burned when prices have crashed and they are wary of over-committing. The International Monetary Fund said the boom has led to higher investment but much of it has been soaked up by shortages of equipment and skilled personnel.
"Oil will increasingly come from unconventional sources, because output has declined from peak levels at conventional fields in many countries, and the size of oilfields is getting smaller on average. This does not mean that the world is about to run out of oil, but it suggests that higher oil prices are needed to induce the additional investment required to balance the market over the medium term."
Turner said it was worrying that the markets ignored the Saudis' announcement that they would pump an additional 300,000 barrels per day. "Saudi Arabia is struggling to stem a long term reversal in production, and any offer to boost output raised the prospect of a steeper drop from 2009, when the decline in global supplies is expected to accelerate. It is perhaps telling that futures prices have climbed even more quickly than the spot market, underlining the very real fears of peak oil."
If the peak oil theories are right, the market frenzy seen this week is likely to return even if prices drop back temporarily when the bubble bursts. "Because the price of oil is particularly vulnerable to global events, it will always be volatile, displaying peaks and troughs like a hospital monitor tracking an irregular heartbeat," said Andrew Simms of the New Economics Foundation.
"What's different today is that there is no way back compared to the price hikes of the 1970s. There are no 'swing producers' to fill the gap. Even the more conservative estimates for the global peak of oil production give us little more than a decade before supplies plateau and begin a long decline."
Source: The Guardian|by Larry Elliott
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