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Two cheers for the blessing of high oil prices

Times Online
The Sunday Times
June 1, 2008

Two cheers for the blessing of high oil prices

“IN times like these, it helps to recall that there have always been times like these,” said Paul Harvey, a leading radio commentator. A “great transformation taking place around the world . . . a tectonic power shift . . . the world is very different,” writes Fareed Zakaria in his The Post-American World.

They’re both right. We have indeed seen economic downturns many times in the past, some severe, some shallow and short. We have gone through periods of rising oil and commodity prices, of a falling dollar, and of rapid technological change. So Harvey is right.

So is Zakaria. We are finally seeing the impact on the world economy of the emergence of China, India and other once-poor countries. The good news is that we have brought billions of people into the world trading system, enriching them so they can afford to eat regularly, and trade their bicycles for cars. The less good news is that the process of adjusting to this increased demand on the world’s resources is proving painful, especially here in America.

Previous increases took the price of oil, and most especially of petrol, to levels that were merely annoying. Anyhow, they proved to be temporary, as modest adjustments in fuel use and advances in technology combined with new supplies to ease price pressures. The current price spurt, which has taken petrol to over $4 a gallon (53p a litre) — still half the level in Britain and other parts of the world, but previously unheard of in the US — is different.

For one thing, it coincides with other pressures on the consumer, not least big increases in food prices. More important, consumers seem to have decided that the new higher petrol prices are unlikely to prove to be a transient phenomenon. So they are changing their behaviour.

The day of the Chelsea tractor, as you call our SUVs, is over. These vehicles sit, unloved and unsold, on dealers’ lots, and with them any hope that the likes of Ford and GM will be able to turn a profit in the foreseeable future. Meanwhile, there are long waiting lists for the Toyota Prius, which is commanding premium prices, and other hybrids, including — a Detroit bright spot — the Ford Escape. Some experts calculate that at today’s prices, hybrids, which run on a combination of petrol and electricity, make up for their higher prices in somewhere between two and three years for the average 15,000-mile-per-year driver.

Meanwhile, during the long period in which the vehicle fleet is turning over, consumer behaviour is changing. Miles driven are down about 4%, and public-transport use is up 20%. Ride-sharing postings on the web are up 88% in the Virginia suburbs of the nation’s capital, tele-conferencing is on the rise, a Colorado IT consultant tells me she has switched to a motorcycle, and consumers are trekking to the malls less frequently. Shippers are consolidating loads so as to reduce the number of shipments as truckers, faced with a more than doubling of diesel-fuel prices to $5 per gallon, tack on fuel surcharges.

The rapid shift in behaviour has caught public-transport operators by surprise. Officials are scrambling to get more buses, and to add coaches to commuter trains. And the longer-term consequences of $130 oil and $4-$5 petrol will exceed those we are now witnessing. Businesses will schedule workloads to make it possible for employees to use the bus or train, or work at home; some long-distance commuters will soon find life unbearably expensive and trade their McMansions for urban flats.

There is a lesson here for politicians. For years successive presidents and congresses have railed against America’s dependence on foreign oil: President Bush refers to America’s “oil addiction”. Recently, politicians who worry about the nation’s dependence on foreign oil have forged an alliance with environmentalists who allege that the end of the world is nigh as a warming globe inflicts upon us floods and droughts, as well as pestilence and a world devoid of polar bears. So they have increased mandated fuel-efficiency standards, forcing carmakers to include in their output mixes cars that nobody will buy; subsidised the production of ethanol from corn, adding to upward pressures on food costs; and spent billions subsidising new power-generation technologies — with an effect that few will argue is proportionate to the cost.

Meanwhile, Jim Rogers, head of Duke Energy, one of America’s largest utilities, reports that thermostats have been adjusted to cut electricity use; petrol use has fallen as more consumers share cars and switch to public transport; and, lo and behold, all the things the politicians have been trying to force consumers to do are getting done.

Unfortunately, politicians remain opposed to allowing high prices to do what high prices do best: curtail demand and increase supplies. So here and in Britain they try to find ways of bringing prices down — by brow-beating oil-company executives, or promising to lower petrol taxes, or begging the Organisation of Petroleum Exporting Countries for mercy. In America, areas in Alaska and off-shore California, Florida and other states remain closed to exploration and development, while politicians responsible for these bans rail against Opec for not producing more oil.

Vladimir Putin, eager to stem the decline in Russia’s oil production, is reducing the tax burden on his nation’s oil companies to increase their incentive to drill and produce high-priced oil. America’s politicians, the Democrats leading the way, want to raise taxes on US oil firms, never mind the supply-side effect of such a move. “Across the world,” writes Zakaria, “economics is trumping politics.” Unfortunately, the triumph of economics is not yet complete in Washington DC.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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