The oil debate rumbles on.Yesterday saw the release of the latest set of minutes from the Bank of England. The recent inflation report from the Bank made the release of these minutes almost irrelevant. We already knew it was worried about inflation, but that MPC member David Blanchflower wants to see rates slashed and the minutes just confirmed this with the voting going 8-1 for rates staying on hold.
But the really interesting bit was this paragraph: “Speculative purchases did not seem to be the prime cause of the recent increases in the oil price. More fundamental demand and supply factors had probably been at the root of its steep rise during recent months and there remained considerable uncertainty about the oil price outlook.”
Meanwhile, in the US, oil company bosses were hauled up in front of Congress.
And the Senators roared their displeasure. Top of the pride was Sen. Richard Durbin, D-Ill who said, “You have to sense what you’re doing to us we’re on the precipice here, about to fall into recession Does it trouble any one of you the costs you’re imposing on families, on small businesses, on truckers?”
To which the oil chiefs said, “Hey, it’s not our fault, blame the Arabs oh, and those environmentalists, blame them too and the Chinese.”
Well, actually, they put it more diplomatically than that.
Robert Malone, who is both chairman and president of BP America Inc., said, “Today’s high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation.”
John Hofmeister, president of Shell. put it this way: “The market is squeezed by exporting nations managing demand for their own interest [that’s the blame the Arabs bit] and other nations subsidizing prices to encourage economic growth [and that’s the Chinese].
Meanwhile, others said that if only they had been allowed to drill in Alaska and the Rocky Mountains, then there would be plenty of supply.
It seems that everyone is looking for someone to blame.
There is now a growing feeling that consumers of oil need to get together and negotiate in one block with OPEC.And judging by comments we reported on yesterday, that includes the Chinese.
In truth, though, we are seeing the grindings of an ancient wheel. Take as an example of this wheel the Arctic hares and lynxes.
In his book, Why Most Things Fail, Paul Ormerod told the story of how statisticians in Hudson Bay had observed a regular cycle in the population of these two species.Further study revealed that when the population of hares in the region was high, the lynx thrived and its populace increased in size rapidly, until the predators were consuming hares faster than their long-eared prey was able to reproduce. As a result a shortage of hares followed, and a greater effort was required by each lynx to catch its dinner. In time, mass starvation of the lynx occurred, and its population fell rapidly, the hares then found little impediment to their own struggle for survival, until eventuality the cycle repeated itself.
The mistake these two creatures were making was that they were not seeing the big picture.Each boom caused the next slowdown because they failed to take into account that the actions of individual hares and lynxes were being duplicated across the entire population.
Throughout the 1990s, oil was cheap very cheap.As a result, investment into oil exploration was low.But, more seriously than that, investment into finding alternatives was low too.The US buried its head in the sand over global warming development of solar, wind, wave and tide power was held back.
Forget about fears over climate change, renewables only really hit centre stage when oil rose above $50 or so.
The period of cheap oil encouraged the use of those great big gas guzzlers we see on the roads the SUVs.
This is changing. A couple of years ago, if you drove around in a 4-by-4 it said this about you: that you were rich and successful. But now attitudes seem to be changing, and the perception of 4-by-4 is changing. The likes of Jeremy Clarkson with their enthusiasm for burning rubber and noisy engines, seem a little pass.
In the US this change of attitude has manifested itself in the success of Toyota and the decline of GM, Ford and Chrysler.
When economists look at historical trends they often seem to forget how new things are. Sure we can trace the price of oil back over 100 years now, but actually the world has changed so much over that period, that it seems unlikely there are many lessons to be drawn today on how oil behaved in the past.
The current pressures that are pushing up the price of oil are different to those that were in place in the 1970s.
But human nature and the laws of economics do not change. Oil at $130 a barrel is simply unaffordable.Countries which subsidise their oil will soon find this is just too expensive.
The only way oil will remain at current levels will be if the global supply of money expands and inflation soars globally.
And the jury is still out on whether that is a real fear.
© Investment & Business News 2013