FT.com | Gideon Rachman’s Blog | Column: $100 oil would have a big political impact

November 7, 2007

Column: $100 oil would have a big political impact

People facing alarming birthdays often say things like: “Forty is just a number.” You could say the same about “$100 oil”. But such benchmarks concentrate minds. As the oil price threatens to break through $100, politicians all over the world will think hard about the strategic consequences.

So what is likely to happen? The biggest single effect is obvious. Oil producers become richer and more powerful. The biggest oil consumers – the US, China and the European Union – become increasingly anxious. Beneath that big trend, there are smaller effects that could change the course of some of the most delicate and dangerous problems – Iraq, Iran, China’s foreign policy and the resurgence of Russia.

The effects of a rising oil price on the economies of the producing countries are dramatic. The Organisation of the Petroleum Exporting Countries made $650bn from oil sales in 2006, compared with $110bn in 1998. Russian oil and gas revenues have quadrupled over the same period.

When bad governments make good money, they become more relaxed at home and more assertive abroad.

The remainder of this column can be read here. Comments can be made below.

November 7th, 2007 in Oil | Permalink

46 Responses to “Column: $100 oil would have a big political impact”

Comments

And we cannot forget the effects that increase has on food prices. Milk, wheat, bread…they are going up over 20% this year. Higher costs of oil mean higher manufacturing and logistics costs.

As we know sooner or later there will be an American air strike over Iran (the question is not if, but when) and that will increase the price of oil perhaps another 10% but at the same time if that means an economic recession at the end of 2008 the result will be gradually lower oil prices….
Posted by: Enrique | November 8th, 2007 at 1:15 am | Report this comment
The article was very good. When Bush one went after Sadum Hussain he said $25 a barrel oil would bankrupt the west. What will $100.00 do?
I think the Americans have shot them selfs in the head, foot and chest with the invasion of Iraq. (1) they are keeping Iraqi Oil off the market inflating the real price of oil. (2) They have cost the U.S. Government to much money and extingquished too many lifes to get Sadum of of a fox hole.(Ted Turner qoute)(3) They have divided the united states into two camps one blood thristy war mongering and the other, lets cut our loses and come home. (4) The tremendous cost of the injured soldiers will have a heavey after cost let alone the families that have been destroyed. (5) The US oil companies are in denial if they think Iraqi politicians are going to give them 75% of their oil profits. It’s not going to happen. If they vote for that, they will have two slugs to the head right after the vote. One thing for sure, the Grand Old Pirates will take one hell of a beating in the next election with gas prices so high. The SUV driving suberban white females will vote them out with lightning speed.
Posted by: Albert Jackson | November 8th, 2007 at 8:26 am | Report this comment
Is $100 oil really that bad in the longer run? In the short term the consequences on foreign policy and the economy are indeed worrying and Dutch disease in countries with oil reserves will continue to inhibit broader economic development, while oil revenues placate the population, limiting the impetus for political change internally and encouraging external belligerence. Granted.

However in the medium term, sustained high oil prices will force a structural readjustment in the big oil consuming countries that is necessary and desirable. The fear of the inflationary impact is temporary by nature, assuming that at some point higher prices will stabilize. Consumers will ultimately adjust their behaviour accordingly switching to less energy intensive goods and services. Higher oil prices should also spur conservation. High prices need to be perceived as permanent for much of the adjustment to occur, where conservation is not just about jumping on a bike rather than into a car to go to work, but about designing homes, cities and transport in a more energy efficient manner, which requires longer term planning in advance. Fortunately for China and India, they are at their phase of industrialisation where they are well positioned to do that from the get-go. The US and to a lesser extent Europe will have a more painful adjustment.

On the supply side, high oil prices will make alternative renewable energy technologies that are currently subsidized economical and will allow an un-subsidized wind, solar and other energy market to develop so that the non-fossil fuel energy market will become more efficient as the need for government subsidies falls away. This also means that truly uneconomical alternative energy (such as certain biofuels) will not be able to compete in an un-subsidized market and will cease to be produced (although the power of the farming lobby could prove an impediment to that). A more diversified energy supply should in theory reduce the oil consuming countries’ reliance on unpleasant oil producing nations at least to an extent, which should reduce their ability to throw their weight around on the geopolitical scene (although it does little to spur internal political reform). It is also likely that the oil consuming countries will look for more oil and gas in harder to reach and more expensive locations, which are now economical at $100+ oil, and this should further diversify supply and reduce the monopoly power of the current oil and gas producers. Higher oil prices will also likely engender a switch to other currently unpalatable energy supplies such as coal and nuclear energy, which, at least in the case of the former, will have negative externalities, but at least will not contribute to Saudi and Russian state coffers.

Oil has two big negative externalities: it emits carbon that causes global warming and it props up unpleasant regimes. Moves to conservation due to higher oil prices should mitigate the former, while switches to alternative energy sources should reduce the power of the latter. Everybody is very worried at the prospect of an unsettling period of adjustment to higher oil prices and the geopolitical consequences. I will allow myself to be an optimist and say that the forces of supply and demand will ultimately prevail for the better (and maybe even faster than people imagine) and higher prices are the only thing that will force this adjustment to take place.
Posted by: Collins | November 8th, 2007 at 10:24 am | Report this comment
More coverage of how the Americans ARE managing Iraqi oil and related revenues would be helpful. KPMG raised serious issues in its 2004 audit. Little media follow up or pressure has been seen.

Underlying the scenario you well describe are fundamental issues that perhaps will be addressed in the 21st century.

Martin Wolf raised the question the other day as to whether governments are merely administrative institutions with bordered mandates in an otherwise open world, or entitled bodies responsible for the integrity of the historic claims of societies (usually tribal nations) to specific terrains on this planet and all that is on, under or above them. The Law of the Sea struggles with claims over the planets salted waters, and the current run of spurious claims over polar land masses and melting ice caps is making diplomats uncomfortable. They are not trained in such affairs.

Your article suggests that all too often the “wrong” people have inherited rich land titles. This idea suggests that America’s huddled masses, Europe’s well-cloaked mandarins, and China’s (according to Felix Drost) exceptionally bright-if-largely-still-huddled masses are then reliant on financial instruments and global control of commerce and trade for sustenance. Any residual colonial arrogance in the article’s concerns is understandable and forgiveable.

Theories of competitive advantage are long outmoded. Theories and laws as to what are natural or economic resources, and who controls them and is thus entitled to their economic value , are no longer fully suited for this new world. It is debatable as to how efficient energy markets really are at present.

Those who do understand the new realities are the very same who are rendering democratic and open market processes as little more than CNN or BBC World infotainment. Dick Cheney, while not really so bright, thinks he is amongst such a group of cynical visionaries. Nicholas Sarkozy, ditto, and thus his posturing. Imagine seeing these two playing poker with Vladimir, Hugo and King Abdullah. France would not fold.

In judging the current oil situation as we know it, I find more arguments to support criticisms of US energy and foreign policy than I do of those against OPEC. The latter has had a closer eye on the real underlying values, which Americans, thanks to contract games and Saudi politics, have not covered in their pump prices for a very long time.

The risk now is that Washington will replace terrorism, as experienced on 11 September 2001 (they are really oblivious to the tragedies in Madrid, London, Karachi, Beirut or Jerusalem), with fears of having their cars parked in a country where little more than row boats and bicycles can serve as alternative forms of transport.

Facing such a bleak future, Americans will likely demand more aggressive action against their Islamic and Latino bogeymen. No?
Posted by: WCM | November 8th, 2007 at 10:38 am | Report this comment
Well, if we refuse the Americans ANY common sense at all, they probably will. However, as the recent polls show, even Americans have finally got it that the military solutions of ensuring control over oil are counter-effective. Even if Iran is attacked before Bush goes, the Democrats - getting a major electoral boost from both a second war prospect and fuel prices hike - will stop this new military adventure immediately, making any subsequent operations, say in Latin America, increasingly unlikely. However, even with extended occupation of foreign countries (for which the US do not have resources anyway), oil supplies infrastructure is so vulnerable to terrorism and guerilla warfare that any effective occupation is unfeasible to continue over long term.

Despite Bush and Cheney being so marginal, I doubt they are prepared to put to risk the image and the future of their own party for decades to come. Any further military action now when US Senators warn the whole national defense is dangerously overstretched would clash them against not just the by-partisan Congress and not just the voters but against the majority of their own party, it seems.
Posted by: A Russian | November 8th, 2007 at 12:16 pm | Report this comment
The commentators above have all made some excellent point, particularly Collins.

I say:

1-) Some of things described are already happening and the article fails to mention that a high oil price may merely add additional actors to the play. Here are two example:

- “A bad government with lots of money” is a good description of the Bush administration that has used hundreds of billions of dollars in pursuing military adventures that have made the world a much more dangerous place.

- Mr. Rachman says: “The search for oil has already led the Chinese to cut a series of deals with dubious African governments.” Well, isn’t America exactly doing that in Africa and all over the Middle East? So what’s new, exactly?

2-) If a side effect of high oil price is that the poor in London and Managua are subsidised and the Lebanese and the Palestinians are assisted in fighting for their legitimate rights, then I say Hip Hip Hooray to high oil prices.
It allows some balance to the $12bn + annual handout by the US to Israel and may lead to peace.

3-) For all the talk about about ethanol etc., the only reasonable and sustainable alternative fuel to fossil fuels is nuclear energy and this is likely to remain so for the foreseeable future. This simply means that countries that have not mastered the nuclear cycle shall be dependent on a “nuclear Opec” and have to pay extortionate prices or face politically-motivated sanctions every time they try to slip the Western yoke.
I know for a fact that the nuclear debate inside Iran is very much cognisant of this issue.

Best,

P
Posted by: Pacifist | November 8th, 2007 at 12:19 pm | Report this comment
I find it sad, if unsurprising, that the solutions you propose are all on the supply side (even worthy ones like alternative energies other than biofuels) and not on the one thing that we actually fully control: our demand.

As to the impact of $100 oil, it’s likely to be surprisingly weak. The price is obviously not high enough to make us change our profligate ways - which means that it will increase until it becomes so, which is likely to be a lot more than today.

Over the past 2 years, I have written a “Countdown to $100 oil” (Opus 52 can be found here: http://www.eurotrib.com/?op=displaystory;sid=2007/11/6/163943/505, and all earlier texts are linked over there) and the main conclusion of examining the issue from every angle is that our societies are still in massive denial about the increasing oil scarcity.
Posted by: Jerome a Paris | November 8th, 2007 at 1:33 pm | Report this comment
Pacifist -

You are an expert at Whataboutism!
Whether the US or the UK or France stuck dodgy deals with African countries in the past, does not change the fact that the rise of China’s influence and cash in Africa is a legitimate concern. Of course Western governments don’t have squeaky clean hands, but if and when they do c*ck up, they feel the heat - sometimes losing elections. As far as I can see, not the case in China.

Your second point is plain idiotic - your many contributions to this blog are normally valuable and informed. (btw - seen what oil money did to the spread of wahabism? The Palestinians deserve better that being “bought” that way - they would then be used by their new oil sugar daddy as a pawn in whatever jostle for influence in the region)

As for the third, it is based on a rampant misconception about oil/petrol’s uses. It is almost NEVER used to generate electricity!!! (that’s overwhelmingly coal & gaz, and nuclear of course) Oil’s number use is for transportation, and then it’s for industrial applications including chemistry, plastics etc… Ethanol is already a profitable substitute - check out Brazil. (cost is something like $1-2/gallon)
Then you seem to think that nuclear energy is cheap. Well, if you look at the cost during the life of the power station, yes, you are right, it is indeed cheaper. But once you include the costs of building the plant (and the usual delays, count in years, not weeks), and the cost of decommissioning and handling the waste, then nuclear is no panacea. (when France IPOed EDF, the state agreed to pick up the tab for the costs of decommissioning! - otherwise, no investor would have wanted the shares!)
Another interesting fact - most oil producing countries import (yes, IMPORT!!!) large quantities of oil products because they lack the refining capacity. (see Nigeria for example)
It takes years (and cash & skills- that’s why they tend to be owned by BP, Exxon etc..) to build a refining complex and most oil-producing countries have preferred cashing in through rent-seeking rather than develop their economy. I’m not expressing an opinion on Iran’s quest for nuclear energy whatsoever - what I’m saying is that had the Iranian successive governments had an ounce of good economic sense they would have got a few oil majors in to build spanking new oil refineries. Of course, that means making official peace with the US (which has extra-territorial laws preventing firms dealing with Iran). A very small price to pay to help millions of Iranians…
Posted by: French_in_London | November 8th, 2007 at 1:56 pm | Report this comment
Jerome, the link seems disfunctional. But your point is actually very important. If energy is translated into lifestyle: can all 7 bn (or would-be 10 bn) people live in and heat 100-200 sq.m. apartments or houses? Can 7-10 bn people consume 500 litres of water a day? Can they drive 5 bn private cars?

If we look from this angle, high oil prices are our last warning. Either the global civilisation changes its priorities and becomes more egalitarian and frugal, or it continues to pride itself on so many of its insurmountable divisions: oil consumers versus oil producers, good governments versus bad governments, nuclear-powered versus nuclear-poor, democratic agressors versus totalitarian defenders etc. The humanity certainly needs a common denominator. May scarce energy become one?

It also seems an almost divine providence that oil prices are so high now when we are so close to the no-return point in CO2 emissions threshold (550 pmg, with the current level 480 if I’m not mistaken). If suburban SUV female drivers did not give a damn about global warming science, at least they will pay attention to prices at filling stations.
Posted by: A Russian | November 8th, 2007 at 2:17 pm | Report this comment
French in London: “As for the third, it is based on a rampant misconception about oil/petrol’s uses. It is almost NEVER used to generate electricity!!! (that’s overwhelmingly coal & gaz, and nuclear of course)”

That seems to be wrong. The N240 Hors Serie of Science et Vie (Septembre 2007) attributes 34.3% of the world’s electricity production to oil, against 20.9% for gas, 25% for coal and 6.5% for nuclear. I don’t know about today but several years ago Russia used fuel diesel (heating oil) extensively in its power stations. Domestic heating devices working on heating oil are used quite a lot in Europe too.
Posted by: A Russian | November 8th, 2007 at 2:29 pm | Report this comment
Hi French,

- I think Jesus was the ultimate expert in whataboutism. After all, he said Let he who is without sin cast the first stone”

- My view is that was that the particular point made by Mr. Rachman has no substance because it does not represent a change as a result of $100 oil prices. We all know that the support of nasty governments by resource-hungry consumer states has been going on and will continue to go on so where is the change?
Moreover, the fact the US is a more democratic state than China has not made any difference to the people of the Middle East and W Africa. Unlike what you say, nobody has lost an election in the US (or anywhere else in the West), for supporting the energy-rich third world tyrants.
(Also ask those demonstrators in Georgia whose bones were being broken by the pro-American, supposedly democratic, government last night if they felt any better than when they were being beaten up by KGB brutes.)

On this topic, there is a great book, recently published called “America’s Kingdom” that I recommend to you. Here is a review of it in the London Review of Books:
http://www.lrb.co.uk/v29/n14/ali_01_.html

- I don’t think the point about helping people to defend themselves is as idiotic as you make out. If it is idiotic to be able to defend yourself, why is America arming Israel to the hilt? It is a sad fact of Human nature that the weak are trampled and the best way to stop being abused is to stop being helpless.

- As for substitution of oil by nuclear energy, I assume you have heard of electric or hybrid cars? Cars like Prius (made by Toyota) are already in mass production. Moreover, electric buses and trams can replace their petroleum dependent equivalents. All major car companies have already had projects for electric cars following environmental initiatives in places like California demanding zero emission cars.

- Iran’s problem with oil is not just refining it. It is projected that Iran’s oil production could be equalled or even surpassed by her domestic consumption in the next 15 or 20 years. That’s why it is important to generate electricity by other means.
About refining you are absolutely correct. Iran miscalculated about 10 years ago because the price of refined products were so low and it seemed to be an inefficient allocation of resources to build refineries when you could import from neighbouring countries who sold below cost. Now, the tables have turned.

Best,

P
Posted by: Pacifist | November 8th, 2007 at 3:03 pm | Report this comment
A Russian:

Take a look at the OECD (still the biggest consumers by far) figures: (check the br/d)
http://omrpublic.iea.org/demand/demdg_oc.pdf

Granted some gasoil/diesel goes into non-transportation use, but most does.
As for producing countries, they’ve always tended to use the stuff they extract as much as possible. Many oil producing countries subsidize enormously oil-derived products for domestic consumption which so some usage of the stuff is distorted.

This is the electricity generation in France - unusual because it’s 78% from nuclear, and only 1.8% from fuel oil. It varies for different countries, but even in the UK which has oil, the wholesale electricity price is corrolated to gaz prices not to oil prices.

http://en.wikipedia.org/wiki/Economy_of_France

There’s no argument that oil is essential to modern economies but it is primarily not because it’s used for electricity generation.
Posted by: a | November 8th, 2007 at 3:17 pm | Report this comment
Pacifist-

$12bn in annual aid to Israel?! Wow! - wish it were true.
Posted by: pessimistic | November 8th, 2007 at 3:26 pm | Report this comment
French, it’s not SOME, it’s the LARGEST share that oil has in electrical energy production. If you do not believe your own scientists, check in wikipedia which has 37% for oil:

http://en.wikipedia.org/wiki/World_energy_resources_and_consumption

Your first link seemed irrelevant to me. Where does it give the breakdown of energy production by source? As for the second, everybody knows that France is mostly nuclear-powered and a special case. If only France were the whole world…
Posted by: A Russian | November 8th, 2007 at 3:40 pm | Report this comment
The energy economics I’ll leave to those who can demonstrate serious competency in the related fields to enlighten us. A considerable part of my studies went into the subject, but more than two decades ago, and I read other literature these days.

One point that I will venture to make will be in the form of a question as to what effect informed people–Pacifist, are you already typing?–may think shareholder value is having on the oilcos record of R&D. No doubt, most will think they’ve never been good global citizens, but I’m prepared to say their record between the late 1970s and mid-1990s was not so bad. My only work in the field related to Exxon, Royal Dutch/Shell and PDVSA in 1984-85, when the former two were disposing of/locking up then-state-of-the-art refineries in Curaçao and Aruba, and the latter was trying to prove itself worthy/capable of not screwing up the one in the second location.

It is a hard business and one in which I have met a relatively high number of real pros. From what I can see of their participation in conferences these days, and from scuttlebut I hear from grumpy old engineers, these companies are increasingly run by the lawyers and the marketing “girls”. (I’m really not so sexist, but life is short–ten years shorter than the average girl–and I will only have time to work with goddesses when we are speaking of military tactics or hard industries who are truly smarter than us mortal males.) Even so such concerns are limited only to the US and UK oilcos, which are tuned into to shareholders and media. Recent experience with strategic European energy companies reassures me that the whole industry is not at risk of soft management. Nonetheless, it is what remains of the Sisters that are still steering some key investment decisions.

A Russian’s rebuttal to my previous post is well noted. I did not intend to suggest that I thought the US could organise any more wars. I agree, they can’t. I’m not sure I agree that the political will to make noise has burnt out. Either way, US public opinion will likely be a problem, and I agree with jerôme that we are still below the long-term crisis price, except that the US will soon show a relatively lower pain threshhold, especially in an election year.

As for the US public’s comprehension of where we are strategically in the Middle East, I think it is alarmingly off the mark. European public opinion is much better informed on average. Americans never “got” as they like to say what the war was really about or what it meant. Thanks to its overloaded media culture, the few who do are tuned out and the rest are living in a state of denial and/or fear. America is generating much noise, but it is frighteningly rare that one hears either sound critical thinking or objective analysis from those who like be heard and carry its passport at the same time.

Lastly, returning to pressures on the industry, is there not a lot of naïveté in much of the blah-blah about what we can do to be more green? Again, as in so many other fields, we need leadership, expertise and professional institutions to serve as clearing houses for the many ideas–most well intended, and many good. I’m concerned with America’s love of trend sectors as investment ops, and green is the colour of the years to come. We cannot waste policy-making time, money, and resources on too many weak-in-the-long-term, if popular ideas. Bloggers will not solve this problem.
Posted by: WCM | November 8th, 2007 at 5:34 pm | Report this comment
A russian,

I appreciate the link and the point - this is about energy not electricity generation. In the figures in the article the oil total includes all of the transportation used oil. I agree oil is by far the largest source of energy - but it is not the most important to generate electricity.

Look, I might be mistaken on this point - but I’ve been hearing countless talking heads (analysts) on Bloomberg TV who regularly make the same point at each new oil price record.

Now going back to $100 oil. Well, say Bernanke keeps on blindingly cutting Fed rates, say to 2.5/3%, to boost growth. Then inflation makes a massive comeback through a crashing USD (if you think it’s fallen, if this happens, you will see what crashing is!) So basically you have a worthless USD - which is hurting everyone but particularly oil producing countries whose currencies are pegged to the USD and are already experiencing high inflation in their relatively closed, with little competition economies.
Well then, how far fetched is it to say that then Opec would be keen to price oil in Euro or Yen (or a basket of currencies - which seems reasonable) Then clearly it would be a very very serious problem for the US as it couldn’t afford the oil it needs. But then again, it’s in times of need that great things are created/invented…
Posted by: a | November 8th, 2007 at 8:25 pm | Report this comment
GR:”So what is likely to happen? The biggest single effect is obvious. Oil producers become richer and more powerful. The biggest oil consumers – the US, China and the European Union – become increasingly anxious. Beneath that big trend, there are smaller effects that could change the course of some of the most delicate and dangerous problems – Iraq, Iran, China’s foreign policy and the resurgence of Russia.”

Steve LeVine argues oil shares are rising because the markets do not grasp that this increase in oil company profits is “smoke – a deception…. It’s not company growth, but the oil price bubble.”

And he adds as soon as this is understood anyone who has shares will cash in and sale…if he is correct, then when that $100 plus moment hits …that could prove to be a very volatile day(s) …as money moves elsewhere and/or out of the market….more market volatility will also have political consequences…these are Black Swan days…politically and economically…
Posted by: Lisa-Helene Lawson | November 8th, 2007 at 8:42 pm | Report this comment
Just ask American army leave mideast, the oil price will drop back to $40-$50. Given Bush and Cheney’s link to oil companies, I am not surprised that they do not care about regular people’s concerns on oil prices.
Posted by: fatbrick | November 8th, 2007 at 8:42 pm | Report this comment
a @ French, you are both right. Found IEA stats: oil accounts for 7% of electrical generation, down from 25% 30 years ago. My apologies.
Posted by: A Russian | November 8th, 2007 at 9:02 pm | Report this comment
Gideon Rachman states that $100 oil would make US withdrawal from Iraq, with its huge reserves, a less attractive prospect. Unfortunately, it is becoming more obvious than ever that it was precisely those huge reserves that made invading Iraq seem like such an attactive prosepect to Messrs. Bush and Cheney, and their neocon and oil industry friends, in the first place. Isn’t it time that those who point out that both the invasion and the Bush administration’s current unwillingness to leave Iraq have something to do with oil are regarded with more respect, instead of being dismissed out-of hand as “conspiracy theorists”? Perhaps Mr. Rachman’s comment may help to make telling the truth about the connection between the Iraq war and Iraq’s oil more respectable.
Posted by: Roger Algase | November 8th, 2007 at 9:21 pm | Report this comment
re: comment by a– “Now going back to $100 oil. Well, say Bernanke keeps on blindingly cutting Fed rates, say to 2.5/3%, to boost growth. Then inflation makes a massive comeback through a crashing USD (if you think it’s fallen, if this happens, you will see what crashing is!) So basically you have a worthless USD - which is hurting everyone but particularly oil producing countries whose currencies are pegged to the USD and are already experiencing high inflation in their relatively closed, with little competition economies.
Well then, how far fetched is it to say that then Opec would be keen to price oil in Euro or Yen (or a basket of currencies - which seems reasonable) Then clearly it would be a very very serious problem for the US as it couldn’t afford the oil it needs. But then again, it’s in times of need that great things are created/invented…”

The Gulf states have just made statements about their intention to extend their dollar pegs and not to rebase oil prices. One can take them at their word, or are current price rises an indication that they were providing a bit of cover for themselves?

This is close to the scenario I’ve been looking at for several months. As US problems are more and more looking like their in the fundmentals, sticking with your gung-ho buddies makes little sense. OPEC–sans Chavez and Nigeria–has been reasonably rational throughout its history. To move, they may need to ahve a discussion in Mandarin, a language they’re not so comfortable in.
Posted by: WCM | November 8th, 2007 at 9:53 pm | Report this comment
Correction to an earlier post: PDVSA’s eyes were on the Royal Dutch/Shell Curaçao refinery, not Aruba, which was Exxon’s and simply locked up. I failed to glance back at the order I typed them in. Operating refineries is a capital intense activity, and thus the reason many oil producers are short at this point in the supply chain.
Posted by: WCM | November 8th, 2007 at 10:05 pm | Report this comment
.
a rise in energy cost is the visible effect of a drop in spending power , making labor cheaper .
The per capita energy expenditure is a direct indication of their standard of living , the U.S. citizens are at 8Kw , us australians at 6Kw , china at 2Kw
if you consume 1Kw it’s the survival zone with 80% of your budget going on food , now guess what happen if food price double ??
the poor countries government, as a matter of political survival , subvention staple food , never mind what the world bank think

the increas in food price is for a large part due to a very bad harvest in 2006/07 ,wheat ending stock are down to three weeks from eight weeks usually
Posted by: jeannick | November 9th, 2007 at 12:27 am | Report this comment
Jeannick,

Not always “a direct indication of their standard of living” because some nations are more efficient in their use of energy than others:

The per capita energy expenditure of Germany has gone from 4.6Kw in 1980 to 4.2Kw in 2004.

But it is true now Spain has a per capita energy expenditure at 3.2Kw in 2004 while Italy is just 3Kw, reflecting Spain has surpassed the Italian level of consumption given a similar way of life.
Posted by: Enrique | November 9th, 2007 at 3:05 am | Report this comment
Even though my global outlook is about as pessimistic as it has ever been, discouting for a bit Jeremy Clarkson grumpy-old-man syndrome, I back away from Malthusian predictions. A resurrection Riccardian at heart, I guess.

Nonetheless, rational or not, I think it appropriate for the US to feel a sharp pain in the near term. Old fashioned medicine. At the same time, I add it is from knowing the changes in US society that I believe a fast comeback could be expected once some of the Viagra-induced exuberance in its more sclerotic parts submits to the realities of wealth and governance.

Maybe the US farms sector could be restructured and put some more of that fine land back into worthy production with fewer hormone-enhancements.
Posted by: WCM | November 9th, 2007 at 9:45 am | Report this comment
Following on that, I would like to see Mme Dr Merkel cut Sarkozy’s Viagra and anti-depressant ordinances.
Posted by: WCM | November 9th, 2007 at 9:52 am | Report this comment
About OPEC countries rebasing the oil price and dropping the US$ peg.

- Kuwait has already abandoned the US$ peg (since May).

- Iran doesn’t have an explicit peg to any currency and has been trying to sell oil in currencies other than the US$ because of the trouble that the US causes via its clearing system where all US$ transactions have to cleared through a NY bank and the way the US interferes or blocks transactions.

- I understand other GCC countries decided against removing / reducing the US$ link to their currencies for the fear that it would further move sentiment against the US$ and, given their own huge reserves of US$ and American assets, it would lock in a huge currency loss. Moreover, there is an element of self-censorship that it might have political repercussions in Washington, which is their main “muscle” to keep their dynasties in power. Obviously, they think the resulting inflation is a price worth paying, although after the Indian workers’ riot in Dubai (whose meagre wages have been further weakened because of he strength of the Rupee), they may ponder the problem again.

- As for rebasing the price of oil, OPEC is only 1/3 of the world production. I think the price will still be determined in $ , although you may contract to buy or sell it in a different currency. More or less, the same effect can be obtained by entering currency hedge contracts.

P
Posted by: Pacifist | November 9th, 2007 at 11:24 am | Report this comment
The GCC and OPEC are unlikely to act on less than compelling shifts in long-run trends. In addition to changes in oil & gas economics, the GCC and OPEC are recalibrating their models to capture new dynamics in currency reserves (my Mandarin reference). On this point, it is clear few have a handle on some menacing known and unknown unknowns. Immediate O&G market factors also include some potential unknowns:

– Russia and Venezuela;
– reserve issues (i.e., impairment of Royal Dutch/Shell and its Iran claims by sanctions, local politics, and a divided board);
– transparency vis-à-vis Iraq’s contracts, output and estimates; and
– new supply chains and demand models.

The GCC and OPEC, nonetheless, have considerable political weight, but I suggest they are applying it with restraint, while they skillfully rebalance their portfolios away from dollar assets. This takes time and the euro is not yet the Swiss franc.

Washington has been sent some very blount–and discreet–messages by GCC leaders in the past year. Cheney did not spend two three-day sojourns (around visits to Kabul and Islamabad) in an undisclosed hotel suite with a Gulf view last February, with his Powerpoint plan for bring Iran into line with the US, to catch his breath. His would-be host quietly refused to meet with him. This is how GCC leaders communicate their disapproval.

What is different today is that the US has so little clout when it come to the bottomline. It is a debtor nation with means of production significantly diminished from earlier decades. It is a Visa-card economy that is dependent a bit uncomfortably on other people’s money in its banks.
Posted by: WCM | November 9th, 2007 at 3:23 pm | Report this comment
Dear WCM,

Unfortunately the US has too much clout. Just look at this:

“Washington tells EU firms: quit Iran now”

http://www.guardian.co.uk/eu/story/0,,2208177,00.html

If you read on, you see they have forced Siemens (the biggest manufacturing company in Europe) to withdraw from Iran just at the time that Ms. Merkel is resisting unilateral sanctions.

Can you imagine an equivalent American company (say GE) being told by the EU (let alone Germany), what to do?

Best,

P
Posted by: Pacifist | November 9th, 2007 at 3:34 pm | Report this comment
1–Oil is not a major source of the world’s electricity generation (Russian, please see http://www.eia.doe.gov/oiaf/ieo/electricity.html; your wikipedia reference is about energy use, not electricity generation);
2–even if the world focused on building nuclear power plants, as China is doing right now, nuclear would not represent a major component of the world’s electrical generation over the next 25 years (with an all effort, the PRC will go from approximately 1-2% electricity generation from nuclear to 2-4% over the next 20 years).
3–the world’s most significant environmental threat is the building of coal fired power plants in the PRC (over the next 10 years, China will build very dirty coal fired capacity equal to the total current generation of the EU)
4–$100 oil is much more of a threat to the economies of China and India (and the developing economies that supply them with some of their manufacturing inputs) than to the US
5–US gasoline consumption is falling (as it did in the last crunch in the 1970s) as the cost of gas at the pump goes up — this is a good thing — and the US consumer may go back smaller cars
kc
Posted by: kc | November 9th, 2007 at 3:48 pm | Report this comment
On the surface, you are right. Not new, however. Press releases of compliance are not always reflected in the detailed balance sheet.

Watch Sarkozy. This is where his schoolboy neocon ties are at odds with the patrons to whom he reports. Renault, PSA Peugeot Citroen, Carrefour, Total all have significant ops in Iran, as, if you are there, you will know. It has been reported this week that he is trying to find a third way in order not lose his lunch date with Hillary Clinton.
Posted by: WCM | November 9th, 2007 at 3:54 pm | Report this comment
Hi KC,

1-) If France generates 78% of its electricty from nuclear, why can’t others? (Admittedly, nuclear plants aren’t built overnight but they on’t need to take as long as you indicate, if the political will exists.)

2-)Electricity generataed from nuclear power can be used to power electric and hybrid cars (Lexus, Toyota Prius and many more under development) and substitute gasoline powered trains and buses with electric ones. This is a very plausible trend.

P
Posted by: Pacifist | November 9th, 2007 at 4:30 pm | Report this comment
Hi,P:
1–France is not a large market (to compare, PRC built new power gen in one year (2006) equivalent to all of France’s power generation) and I assume your concern is about dealing with global threats before they create massive, long term problems
2–To prevent widespread unrest, the PRC needs to maintain economic growth and that growth is premised on building cheap coal based electricity over the next 20 years equivalent to the entire current EU generation (they would like to use as much nuclear power as possible but even with an aggressive program, nuclear power will only be about 4% of total in 2030)
3–From permitting, planning and financing to generation, you are looking at a long cycle
4–You want to ensure quality construction with this type of power tech because of the obvious dangers
5–There are relatively few engineering firms capable of this work and they are at capacity now; to scale up these firms, you need more engineers etc. and that takes time and you need to quality control and there is an entire eco-system of suppliers and precision manufacturers that would also have to scale
6–Higher input demands (concrete, metals, manufactured items, controls, etc.) can drive up cost quickly; this includes not only commodity costs but also costs of special manufactured components
7–If you include the entire cycle costs, including disposal, it is not clear that nuclear energy is cost effective (and, once the PRC builds its coal power, which it has no alternative but to do (at least from a CCP stability concern standpoint), then it certainly would not be cost effective to replace coal in China with nuclear)).
kc
Posted by: kc | November 9th, 2007 at 4:51 pm | Report this comment
Hi,P:
One additional comment, when “political will” combines with a deficit of fact collection and planning, you have a huge mess (see, for example, the post-Iraq invasion nightmare).
kc
Posted by: kc | November 9th, 2007 at 5:08 pm | Report this comment
Dear KC,

Am I to sum up your views thus?

- There is no alternative to oil so whoever wants it should prepare to go to war to get it ahead of others but, anyway, either we accept lower consumption, lower pollution or we die.

Best,

P
Posted by: Pacifist | November 9th, 2007 at 5:18 pm | Report this comment
Hi, P:
Nope. Wow, you like to jump to conclusions. I was simply setting out some relevant facts re nuclear energy.
Some thoughts:
1– My view is that the developed West (especially the US) can significantly reduce energy consumption without impacting quality of life. For example, if the average mile per gallon of US cars was 10 mpg greater (which it could be tomorrow if people bought smaller, more fuel efficient cars), then US oil consumption would significantly fall (the US has unnecessarily super-sized its gas consumption as it has unnecessarily super-sized its meals).
2–As for the developing world, particularly the PRC and India, they need to figure out a transportation system for their people that has its own unique characteristics and is not a copy of what the US oil and auto companies created (the US car companies bought up the urban street car companies in the US’ major cities and then shut them down to make sure that urban transport would depend on cars — see Yergin’s book on oil for the story). This would reduce future demand for oil and perhaps create a better model than the auto-centric transport model.
3–As for electricity, I don’t see the alternative to coal power in the PRC but the West, for its own health’s sake and the environment’s sake, should help the PRC to make sure that its coal plants are as clean as possible (even if that means helping them with money — better than wasting a thousand billion dollars in Iraq).
kc
Posted by: kc | November 9th, 2007 at 5:40 pm | Report this comment
If you want to know why the Kazakhs and Russians are irritated with the major oil companies — and why Big Oil is in trouble all over the world — look at this quote from a former oil executive in Venezuela:
http://oilandglory.com/2007/11/how-to-aggravate-petro-states.html
Posted by: Eric | November 9th, 2007 at 8:46 pm | Report this comment
Spot on link, even if it just scratches the surface. I worked with PDVSA in Caracas in the mid-80s (when the bolivar:USD went from 4:1 to 14:1) on an extended project, and briefly and at less intimate level again in 1996-97 (when the b was in the 400-800 range). Big differences were afoot before Chavez came onto the stage. Most of the story is told in the Private Banking divisions of Citi and Chase offices in Caracas, Miami and New York, and a couple of legendary warehouse raids in San Juan.

While Big Oil and the ME have fed many books, little is written for the general public about US policies in Latin America from 1950 through 1994, when the tesabono crisis hit. Kennedy’s Progress for Peace could fuel a generation of compensation claims across the region.

I’m not a socialist and expropriation of industry is not something I’m sympathetic to. Yet history has delivered some truly egregious examples of post-colonial expropriation of countries in the names of publicly traded entities. PDVSA’s Venezuela is one such story. The Shah’s Iran was another.

Yet when the cycle turned to the advantage of local share- and power holders, little advice from the likes of the roster of economists on Martin Wolf’s blogs has ever been employed. Arrogance simply comes in different shirts. Altruism is not characteristic or perceptible in the corridors of the Esso-built Lagoven building or the newer PDVSA towers in Caracas.
Posted by: WCM | November 9th, 2007 at 10:39 pm | Report this comment
Just checking in before calling it a weekend. Noticed my reference to PDVSA as a public company. Overall, not true, as 100 percent of shares are state-owned, but in reality the statement largely holds. Between its creation in 1976 and its restructuring in 1996, the company comprised operations developed by four of the Seven Sisters: Exxon, Shell, BP and Texaco. These ops continued to function as independent subs (Lagoven (Exxon), Meriven (Shell), and I forget the other two). During this period, it took a majority stake in Citgo in the US. There is also a major bauxite business and there have always been, and still are, corporate finance operations in Miami, New York and London.

The point is that the Lagoven and Meriven ops continued to employ large numbers of Exxon and Shell managers and engineers after nationalisation. More obvious, there was close, if carefully masked, co-ordination with these companies. PDVSA management acted as though they were somewhat embarrassed by the government hold on business decisions, but when out of sight of their American and British colleagues, their Latin pride popped shirt buttons.

Bottomline: things in this industry are not often what they seem. As I noted before, however, I was impressed with the “cowboys and soldiers” who were driven by a passion for the science and engineering that are at the heart of the industry. Perhaps I should say “…were at…” Merely educated mortals did not challenge these guys regardless of the nationality of passports.

Rumblings from Royal Dutch/Shell in recent years/months, and the book Shell Shock, by Ian Cummins and John Beasant, tell a similar story, and lift the curtain on ops in Iran, but also tell us that politics and marketing are driving over the engineers and scientists. The world will benefit from some tough investigative journalism on Lord Browne and the activities of BP, Chevron, et al, in Central Asia, a region ripe for some serious FT coverage.
Posted by: WCM | November 10th, 2007 at 9:16 am | Report this comment
Sorry, a comma sneaked into my link. The correct link is here:
http://www.eurotrib.com/?op=displaystory;sid=2007/11/6/163943/505

Note this:
http://money.cnn.com/news/newsfeeds/articles/djf500/200711081845DOWJONESDJONLINE001218_FORTUNE5.htm

Big Oil CEOs Point To Constraints On Supply Growth
HOUSTON -(Dow Jones)- Pointing to a variety of political and technological constraints on energy investment, chief executives at two oil giants Thursday highlighted systemic limitations on the growth of the supply of oil, implying that there will be high oil prices for at least the medium term.

(…)

ConocoPhillips (COP) Chief Executive James Mulva (…) said he doesn’t believe oil supply will ever exceed 100 million barrels a day. He didn’t offer a price forecast.

“Demand will be going up, but it will be constrained by supply,” Mulva said. ” I don’t think we are going to see the supply going over 100 million barrels a day and the reason is: Where is all that going to come from?”

(…)

[BP plc (BP) Chief Executive Tony] Hayward said “about half” the world’s oil has been recovered, but he implied that significant improvement is possible on a broader scale. “The biggest source of new oil will come from increasing recovery,” he said.

And this interview of Fatih Birol in today’s FT:
http://www.ft.com/cms/s/0/3c8940ca-8d46-11dc-a398-0000779fd2ac.html?nclick_check=1

which is even more pessimistic in many ways.
Posted by: Jerome a Paris | November 10th, 2007 at 4:28 pm | Report this comment
Curious sentence from Fatih Birol:

“If the governments of OECD, China and India leae all to the markets…they will make a historical miskate”

Will it be really a mistake leaving “all” to the markets. Are the markest stupid?

What can happen? Just the same as in the case of any other good. Perhaps air travelling would become again a luxury with high prices. Perhaps tourism will become again a luxury. And?

Will Government intervention solve the problem?
Posted by: Enrique | November 10th, 2007 at 4:58 pm | Report this comment
“The Russian government will find it easier to buy off impoverished pensioners and to take tough positions on a range of international issues, from the future of Kosovo to America’s plans for missile defence in Europe.”

Disgraceful of course to pay off impoverished pensioners at the cost of SUV drivers and frequent fliers. Let alone to take up positions not dovetailing with the West’s on black and white moral issues such as Iran, Kosovo, missile defence.
Posted by: macbeth | November 11th, 2007 at 4:48 pm | Report this comment
World wide oil production has been stagnating for about 2 years now. Despite rising price and despite increased investment in conventional and non-conventional sources of oil, production is not increasing. The reason geological. World wide flow of oil has reached its peak, just like any one oil well reaches a peak, just like any one region or country reaches a peak, the world as a whole has peaked in oil production. Following such a peak the future is a slow decline of anything between 3 and 15% per year. Look at North Sea production as an example : peaked in 1999 and since production has been decreasing at about 8% a year.

Can you imagine where the oil price will be when world production starts decreasing, even by 1%, let alone by 8%? $200 within a year, $1000 within five. And probably costed in Euro or Yen if the dollar keeps sliding, which it probably will.

Of course as various markets hit recession the oil price will temporarily come down a little - but only for a few months, until consumption catches up again, and always on a rising trend.

Sure, alternative energy sources will help, but it is far, far too late and so far at least far too little. I am not optimistic.

The future is not green, its black
Posted by: PaulS | November 12th, 2007 at 12:30 am | Report this comment
I am very delighted to make a thoughtful comment on very interesting article titled: “$100 oil would have a big political impact” by Gideon Rachman. I agree that the impact of high oil price can not underestimated, because we have to remember the history, which tells us that the low oil price destroyed the economy of the Russian Federation in 1990-99. It is clear that the high oil price will lead to an opposite effect and eliminate the economy of the USA in 2007-2008. Is it good or bad? I think that this is a philosophical question. However, we have to remember that the execution of unwise policies by the US Government in the Middle East such as the war in Iraq, which took 3000 American solders, 650 thousands of innocent Iraqi people and was a very costly military adventure (500 billions US dollars), is a main reason of high oil price. Therefore, there is no need to blame any other foreign power for the high oil price. American people have to blame the US Government and President George Bush for this outcome. I am sure that the 2008 Presidential elections in the US will clarify everything at once.
Posted by: Viktor O. Ledenyov, Ukraine | November 14th, 2007 at 4:59 pm | Report this comment
Wow, I can take all your replies and build up an economics paper…

Thank you to everybody for all your help!

Pierluigi Rotundo
Posted by: PR | November 19th, 2007 at 12:20 am | Report this comment
Anyway, we have to put in practice alternative sources of energy. Soon or later, oil won’t be enough to meet the demand.

Pierluigi Rotundo, Italy
Posted by: Pierluigi Rotundo | November 27th, 2007 at 11:54 pm | Report this comment