Yesterday, the news that the price of oil had gone over the $59-a-barrel mark for the first time because of fears about Nigerian production sent shudders through the world’s stock markets. It also pushed the world’s financial media into overdrive. It raised new fears in consumer countries about ever higher petrol prices and increased speculation about producers making money hand over fist as a result — speculation made with either jealousy or glee depending on who was talking, consumers or producers.
Things are not that simple. Oil companies, for example, like high prices; their profits increase. Governments which tax petrol like them too; the higher the price of oil, the more tax they earn. Nor do higher oil prices necessarily result in higher income for producers, at least not immediately. Most oil is sold in advance. There will be few deals being done for the moment at $59 a barrel. Everything will depend on what happens next — and that will probably be a fall in price, because there is no real basis for concluding, as the market did, that Nigeria is heading for a political crisis and its production is going to drop. Oil dealers have got it wrong. They look at what other dealers are doing and position themselves accordingly, far less than examining the facts, let alone drawing sound conclusions. And the reality is that the price of oil is way above what it needs to be, a fall in US stocks and growing consumption in India and China notwithstanding; capacity still exceeds demand.
It has been remorseless, up 30 percent so far this year, if by staggered degrees - two steps up, one down, another two up, and so on. If it continues, or at least does not start seriously sliding back, then countries such as Saudi Arabia will show a very remarkable, unplanned budget surplus by the end of the year.
The old fear that high prices might trigger a new rush for alternative energy sources, thereby damaging the oil producers’ prospects in the longer term can be laid aside. Across Europe and North America, the rush is already there; it has little to do with prices. It is environmental issues that are driving it, and it has done nothing to dent global oil consumption. The proof of that is the fact that the price of oil continues to rise.
Moreover, all the signs are that the world can and will pay these higher prices without protest. The price of oil has in fact been far higher in real terms in the past. In 1981, for example, the price of a barrel hit $35 because of shortages resulting from the Iran-Iraq war. In today’s values, that would be $74 a barrel. It is not only a matter of dollar values. Engines and other energy dependent equipment and machinery are now far more efficient. A liter of petrol goes much further today than it did in 1981. It is factors like these that have led market analysts to believe that the price of oil can go as high as $70, and probably higher before it triggers economic problems and any serious consumer revolt. The industrialized world can afford it. The only issue, and the one that needs to be thought about most as the world focuses on the fight against global poverty, is the effect of the price rises on the developing world. That is they are going to have painful consequences.
