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Just how high can it go?

The Independent

Soaring prices are a warning that we need to change

Friday, 23 May 2008

Just how high can it go? A year ago, analysts were talking darkly about the prospect of oil breaching $100 a barrel for the first time. It turns out they were too optimistic. The price of a barrel has hit an unprecedented $135 this week. The recent predictions of a $200 barrel of oil suddenly begin to look rather more plausible.

The response to the present price spike from our governments suggests they are in state of denial about oil. President Bush has been leaning on Opec to pump out more crude from the ground. Our Prime Minister, Gordon Brown, is attempting to drum up support from partners in the EU and the G8 to add to that pressure. Meanwhile, two of the US presidential candidates, Hillary Clinton and John McCain, are proposing a “fuel-tax holiday” for Americans this summer. Lobbyists in Britain are demanding a similar suspension of fuel tax on petrol. Yet none of this addresses the true cause of high prices: namely that global demand for oil is outstripping supply.

Opec has blamed the high oil price on speculators. No doubt speculation is playing some part in high prices, but if it was the driving force, we would expect stocks of oil to be piling up around the world as oil is pumped out of the ground quicker than it is burned. Yet there is no evidence of bulging inventories.

Of course, there is no way of knowing whether we have reached that inevitable moment of “peak oil”, when supplies start their long decline, before final exhaustion. Some analysts are forecasting that the price will come down quite sharply over the coming months as oil producers such as Azerbaijan and Sudan increase the productivity to take advantage of high global prices. This may well be the case. But it is nevertheless clear that the economic fundamentals of the world economy (the resurgence of China and India in particular) point to an era of sustained higher energy prices.

This is not the end of the world. In fact, it is the medicine we need to help us kick our economic dependence on fossil fuels. The oil shocks of the 1970s helped to persuade the motor industry to develop more fuel-economic vehicles. There was a drive across the world for energy conservation. Two subsequent decades of historically cheap oil undid much of that progress.

Yet we can do it again. The example of the remote Alaskan capital, Juneau, which has managed to cut energy consumption by an astonishing 30 per cent after being cut off from the local grid earlier this year, shows what can be achieved if the will is there. At a time when fossil-fuel induced climate change is the pre-eminent threat to human societies, a high oil price can help us travel to where we need to be.

The political and social challenges of a global oil shock should not be downplayed. Higher energy prices translate into higher food prices, and higher food prices tend to create serious political discontent, particularly in the developing world. Governments around the world will be sorely tempted to impose price controls or curbs on trade to try to insulate themselves from the effects of this discontent. They must be persuaded that this will only damage their own interests in the long term.

But this discontent is not just a challenge for the developing world. The governments of rich countries, such as our own, will be tempted to indulge in the kind of political posturing we have seen of late in the US over fuel tax, as households feel the pinch of higher prices. And as high oil prices constrain economic growth, the demands for acts of populism will grow louder. They must not be heeded. The high price of oil is a warning that we need to change the way we power our economies. Populism will only make the transition more painful.

http://www.independent.co.uk/opinion/leading-articles/leading-article-soaring-prices-are-a-warning-that-we-need-to-change-832807.html

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