Monday, March 06, 2006

Oil Prices - Myths and Legends

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Revisiting some of the issues in, It's a Gas Man – my blog of 17 February.

Some unpalatable truths about the price of oil and, by implication, gas have been distilled recently. What previous generations thought of as incredibly cheap gas turns out to be mostly a myth. The peak price for Brent crude, as measured in 2002 prices, was in 1981. Previous oil shocks have been painful – but not nearly so painful as we may have thought. Real prices for oil, adjusted for inflation, were actually far higher in 1981, peaking at an adjusted figure of about $55 a barrel. Likewise the percentage of money households spend on energy was 9.5% - today's figure for comparison is about 5%. So, the price of oil is not really historically very high.

Nor has the “high” price of oil resulted in a downturn in the global economy. Shocks in the 1970's had as much to do with the inadequate political expediences as real economic damage. Our leaders at the time were all too ready to peddle the litany that all the problems were caused by someone else – in that case greedy Arabs. Real pressures in the world economy were probably more instrumental in the downturns of 1973 – the Yom Kippur War, the rise in oil prices of 1979 - the Iran-Iraq War, and the price pressures caused mostly by invasion of Kuwait by Sadly Insane in 1990. Economic growth is forecast to be 4.8% this year and 4.5% in 2007. In 2001-2003 the rise was a more modest 3%. The lesson seems to be clear. The price of oil is not a very strong indicator of impending recession in the world economy. More important are the economic decisions taken by governments. Even with the news this week of astronomic rises in home energy costs – in the 20 – 25% range, the cost of energy per household is about half what it was 20 years ago. This is hardly an Armageddon scenario.

It's more the psychological impact of artificial barriers being crossed that is worrying. When the price of gas reaches some new high, say breaking the 3 dollar barrier, it's hard to avoid the bandwagon effect. Commentators and pundits queue up to propose dire consequences if the price remains high. Anyone talking calm and sense is drowned out by the unrealistic demands of consumers to return to the era of cheap gas - whenever that might have been?

With Dubbya making some of the right noises, like proposing to wean the U.S. off cheap oil and therefore lessen the demands and tensions it creates in the political sphere, there might be a window of opportunity to bring America into the real world of energy consumption. “Might be” is about as high a chance as you could reasonably bet on. The chance of convincing Americans that the price of oil is historically low is more likely to be met with scepticism – if not anger.

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