Contact: J.H. Crawford

OPEC, Oil, Blockades, and the Industrialized Nations

AMSTERDAM, 20 September 2000. As of today, US crude oil futures are trading above $37 a barrel. This price, however, is barely half the price of oil (in real terms) in 1980. So why all the fuss? The real story is not blockades by truckers or "high" fuel prices, but the coming decline in oil production and resultant price increases. A return to 1980 prices, or about $75 a barrel in today's dollars, is almost certainly in prospect, the only question being, "How soon?" The current tight oil market is in fact a clarion call for a massive shift to renewable energy. How have we managed to get ourselves into a corner from which there is no quick escape?

After 30 years of evidence that OPEC is concerned mainly with its own welfare, the Industrialized West is now counting on OPEC's willingness to provide plenty of oil at low prices. This is, plain and simply, massive denial. Western politicians seem to think that pressure from their enraged citizens is somehow going to wring more oil out of OPEC. Why OPEC leaders should care in the slightest about pressure from constituents of non-OPEC lands remains an interesting question without an obvious answer.

European governments have been shaken to the core by fuel protests these past few weeks. Some, like France, caved in to blackmail by truckers, some, such as the UK, held fast to what are fundamentally sound policies regarding high and ever-increasing fuel taxes. The protesters have enjoyed wide support from the motoring public, which somehow feels that it is being gouged. What has surprised everyone, apparently, is that there could be a shortage of oil, or that OPEC might be unwilling or unable to solve this problem just by opening a valve somewhere.

How realistic is it to expect OPEC to increase production? Most sources now seem to agree that, with the sole exception of Saudi Arabia, OPEC (and other) oil producers are now pumping as much oil as they can. Any near-term increase in oil production thus turns on the simple question: how much reserve capacity does Saudi Arabia actually have? Estimates range as high as two million barrels a day, which is only 2.5% of the total world consumption. Even OPEC itself has been warning of late that we mustn't rely too heavily on their ability to increase production without limit. In fact, we may be within a few hundred thousand barrels a day of maximum world production, and any interruption, whether caused by natural disaster, terrorism, or political turmoil, will throw oil markets into chaos. We are walking a precipice.

This year marks the passing of peak oil production for all nations outside the Persian Gulf. The US peak was reached in 1970 (notwithstanding production from the huge Prudhoe Bay field in Alaska). North Sea oil will peak this year. The only oil provinces with any significant potential for production increases are in the Gulf. Had we begun several years ago to invest billions of dollars in infrastructure in this area, we could, OPEC willing, have added some additional capacity to offset declining production elsewhere. However, in part because of the all-time-low oil price then prevailing, none of these investments were made, and no significant increase in Gulf production capacity was in fact achieved.

How realistic is it to expect OPEC to continue to try to hold oil prices in the $22 to $28 range? Oil is now trading well above $35. The recent production increase proclaimed by OPEC is mostly smoke and mirrors - most of it merely legitimates on-going above-quota production. The amount of additional oil coming onto the market will amount to a few hundred thousand barrels a day at best. This is not going to get us out of the woods - a cold winter will see some of us shivering. Nothing seems likely to bring prices within OPEC's declared $28 maximum price. OPEC seems to be concerned that prices above that level will cause consumers to shift to other fuel sources. In the short term, that is impossible except on a very small scale.

What about the long term? Do we want to burn more coal, the filthy fuel that causes the most global warming per unit of energy? Some say that natural gas can substitute for petroleum, and perhaps, in some cases, it will. However, demand has been growing steadily as electric utilities have switched from coal to gas for new plants. In many regions, natural gas supplies are tight. Gas is difficult to transport over water, making local surpluses unavailable to other regions. Once OPEC sees that the world must have its oil, almost whatever the price, will they continue to hold to a $28 maximum price? Can they pump enough oil to hold prices to this level? And what of the political situation? Iran and Iraq, two of the largest producers, are hardly close friends of the USA in particular and the West in general. Do we want to be counting on these nations to help us out of a jam?

How can we extricate ourselves from this mess? There is really only one answer: use less oil. This we must in any case do. While we fiddle with the Kyoto accords, the world is more or less literally burning. Most climate indicators are now well outside historical norms, including the recent discovery of a large area of open water at the North Pole. Only a reduction in petroleum consumption can yield significant reductions in carbon dioxide emissions. Thus, any move by governments to reduce fuel taxes in order to keep down the pump price of motor fuels is totally misguided. The UK's strong policy of steady increases in fuel taxes is sound, and Tony Blair had the grit to maintain this policy in the face of undemocratic maneuvers by the truckers to force a change. The Tories, smelling blood, have promised a fuel tax cut. In the USA, there is even talk of pumping the Strategic Petroleum Reserve.

What's to be done? In the first instance, governments should hold fast to fuel taxes. In some instances, it may be necessary temporarily to subsidize groups that have been hardest hit by fuel price increases. Certainly, truckers and farmers should be permitted and expected to pass fuel costs on to the consumer. This will, however, begin to alter the fundamental equation in freight transport. Rail is far more fuel-efficient than road, and as fuel prices rise, this difference will assume a significant role in the total cost of shipping by different modes. The years ahead should see a resurgence in rail freight and barge traffic, with a corresponding (and welcome) reduction in truck traffic.

Just as in the 1970s, there is no reason to assume that sharp increases in fuel costs will not cause major economic dislocations. The stagflation of the 1970s and early 1980s was the economic workout of the radical increase energy costs. While it is true that fuel represents a smaller percentage of most economies today compared to 25 years ago, the price of fuel will affect economies. Oil prices in the $75 range are by no means unthinkable, even within the next year or two - and that merely returns oil prices to their historic high, which occurred around 1980. Such an increase would have far-reaching effects.

What can people do? For starters, use less fuel. Don't buy an SUV. Travel less, move closer to work. More important, citizens must tell their governments that they support high and rising fuel taxes as an essential instrument of public policy, the cornerstone of any effort to reduce greenhouse gas emissions and to encourage improved energy efficiency. In the longer term, high fuel prices stimulate the development of renewable energy, which is the real path out of the woods. The problem is that it's a long and winding path, and only those sure of a profitable market for renewable energy will begin the journey. Caving in to blackmail by a tiny minority is not the signal we should send to the renewable energy sector. Further increases in fuel taxes, especially in the USA, are essential.

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