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Daily Telegraph: Why we should love high oil prices

Why we should love high oil prices
Martin Vander Weyer
(Filed: 25/04/2006)

Oil is seven times more expensive today than it was in 1998 and, according to the doomsters, the rise is far from over. As the price hit $75 a barrel last Friday, there were plenty of experts willing to predict that a conflict with Iran could drive it higher yet – to $120, or $150, or think of a number and double it.

This extreme change in the cost of the basic fuel that drives the world economy ought, on the basis of experience in the 1970s and 1980s, to be causing mayhem in financial markets and panic in treasuries the world over.

It ought to be depressing consumers and devastating share prices. But strangely – or not so strangely, on deeper reflection – it isn't.

The global economy is ticking along at a healthy rate of growth. In Britain, not only has the economy recovered from last year's dip, but retailers have just reported encouraging high street sales in March.

The official figure for inflation, reported last week, is a barely significant 1.8 per cent – because, while fuel has risen, the cost of manufactured goods, including clothing and electrical goods imported from low-wage Asian countries, has fallen dramatically.

And while all those Chinese factories are increasingly thirsty for fuel, there has so far been an adequate balance of supply and demand.

There have been obvious problems in Iraq and local difficulties in Nigeria and Venezuela, but global price rises have been driven more by fear of future major disruptions that may never come to pass.

The FTSE-100 index, meanwhile, has sustained a three-year bull run, and barely wobbled as oil hit its latest peak. Overall, the vertiginous rise in fuel costs over the three years since we went to war in Iraq has done us remarkably little harm.

That does not mean that a continuing spiral towards the sort of three-figure prices that the doomsters bandy around would be just as painless.

But there are sound, non-doomster arguments why the price is just as likely to fall back in the medium term, and it is worth rehearsing the reasons why a period of relatively high oil prices has not been entirely a bad thing.

For a start, it changes the power structure and investment profile of the global oil industry. At current price levels, oil companies can exploit deep offshore deposits in the North Sea, the Caspian and the Gulf of Mexico, and reopen smaller, depleted wells in Texas and elsewhere.

The frozen wastes of Siberia and Central Asia look a lot less inhospitable than they used to.

Suddenly Canada, one of our closest allies, is a big player in the 21st-century energy game, with its vast wilderness tracts of tar-soaked sands in northern Alberta.

All these new and mostly non-Opec sources can now feasibly be brought on stream, along with new refining capacity in which the industry was reluctant to invest when prices were low.

All these factors combine to mean that we are slightly less at the mercy of the Opec cartel and the violent instability of the Middle East.

Meanwhile, at the consumer end of the equation, higher oil prices engender better environmental and economic behaviour.

One negative reason why Britain is less vulnerable to energy prices than it was in the 1970s is that we have lost so much of our industrial base in the meantime – but, on the positive side, what remains is far more efficient in terms of energy use.

High fuel costs have encouraged the motor industry to build hybrid, low-consumption cars, and drivers to want to buy them.

This week's spat between David Cameron and ministers as to whose limousine scores the lowest marks for carbon emissions may have been little more than electioneering, but nothing will focus the consumer's mind quicker on the benefits of green alternatives than petrol at £1 a litre.

Likewise, homes and office buildings are already far better insulated than they used to be, but every householder who has just opened a staggeringly large winter gas bill will have shared the same thought: how can I upgrade my heating technology or change my habits in order to consume less?

And though it may annoy us as petrol buyers that BP and Shell reported pre-tax profits of almost £24 billion between them earlier this year, it also means that they are able to reinvest in energy projects that will keep us warm and mobile in future, to pay dividends that will boost our depleted pension funds, and to pay large sums of corporation tax to Gordon Brown – on top of the £11 billion he will collect this year in direct levies on North Sea oil production, and the 70p he takes on every litre of petrol we buy on the forecourt.

It was the boom in oil tax revenues that enabled the Chancellor – contrary to economists' expectations – to claim at Budget time that he had met his fiscal targets for last year. High oil prices in effect helped to stave off higher taxes elsewhere.

One more useful thing is signalled by the recent surge in oil prices: not that they are bound to go up and up, but that they are actually bound, one day, to come down.

Oil prices are very volatile, and they will indeed go temporarily sky-high if George W Bush and Donald Rumsfeld are mad enough to attack Iran. But high prices both encourage new supply and cause demand to tail off – which means prices must fall.

Eventually, however – experts disagree widely as to when, but it won't be soon – the world will run out of oil. By the time it happens, man will have harnessed new energy from the sun, the tides, the wind, the hydrogen cell and advanced forms of nuclear fission.

The present phase of high prices will help both to retard the exhaustion of oil and to accelerate the search for alternatives. It may be uncomfortable and worrying in the short term, but in the long term we may even be thankful for it.

  • Martin Vander Weyer is business editor of The Spectator
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