Rising petrol prices, empty filling stations, striking lorry drivers, crisis meetings at Opec, the $35-barrel of oil: are we heading back to the dismal 1970s?
Put more soberly: is the rise in petrol and heating-oil prices the result of a temporarily malfunctioning oil market and the trucks and tractors blockading refinery gates? Or is a decade of cheap energy, and with it the great festival of western and Asian prosperity, ending with a bang?
The ten ministers of the Organisation of Petroleum Exporting Countries (Opec) meeting in Vienna on 10 September, agreed to increase their production of crude oil by 800,000 barrels a day. The increase was more generous than the markets for crude oil and petroleum products had expected. The next morning, prices for cargoes of Brent oil, a North Sea variety landed in Europe, fell by 40 cents to $32.38.
The Opec ministers reached agreement quickly, and amid unusual cordiality. Opec is in no mood for confrontation with oil consumers in the west. Since March of this year, the producers have been seeking to establish crude oil prices in a range between $22 and $28 a barrel.
The producing countries have known to their cost since the 1970s that sharp rises in crude oil prices are apt to pitch western economies into inflationary recession, or what used to be called “stagflation”. That happened in 1973-74, 1979 and 1990. High crude oil prices over long periods tempt western oil companies into developing oil provinces that they had formerly thought too remote or difficult to work. Either way, demand for Opec oil falls. Few of the producing countries have other sources of revenue.
Yet in the notoriously foggy markets for crude oil and oil products, the latest production increase is much less than meets the eye. It is small in relation not only to a world market for crude oil of 78 million barrels a day, but also to Opec production, estimated by the Middle East Economic Survey on 11 September at 29 million barrels a day.
Opec itself likes to point out that it has raised production already this year by about three million barrels a day and that has not stopped the tripling of crude oil prices. With most Opec members producing at the limit of their industrial capacity, the extra crude oil must come from Opec’s largest producer, Saudi Arabia. As in the 1970s, Saudi Arabia is being asked to use its immense oilfields to restrain prices.
For the moment, it seems the Saudis have no shortage of oil or producing capacity. “There is absolutely no problem putting additional crude oil into the markets,” Ali al-Naimi, the Saudi oil minister, said in New York on 5 September. The problem is nearer the petrol pump. Aside from a spike in oil prices at the time of Iraq’s invasion of Kuwait in 1990, oil prices have been weak for nearly 20 years, and the big oil companies have been reluctant to invest in new refining capacity or tanker tonnage. To reduce their costs and capital employed, they have tried to run low inventories and order only as they need.
The problem is compounded by a sophisticated market. Cargoes may be traded many times over between the well head and the petrol pump, and refiners and producers like to hedge against price changes by buying and selling in futures markets. Inured to two decades of low oil prices and Opec disharmony, futures traders believe that the present price of crude oil is a temporary aberration, and oil is headed down.
For example, a barrel of crude oil was quoted in New York on the eve of the Vienna meeting at $33.63 for immediate delivery, but at only $30.41 for delivery next March. In such market conditions, why should a refiner of gasoline or heating oil buy in crude oil and tie up his capital, when supplies can be bought more cheaply down the road?
Bearish futures markets are thus pushing up prices for immediate delivery. The US has not had so little crude oil in stock since the crisis of the mid-1970s. Markets are thin and local shortages set off panic-buying.
Ali al-Naimi said on 5 September that current oil prices were not justified: “Eventually a lot of this price is hype,” he said. Maybe. It is also possible that the US refiners won’t buy al-Naimi’s extra barrels till they can process them, and then all plunge in at once.
Between them, Opec and the oil majors have abolished most of the cushions against sharp price movements in the markets for crude oil and oil products. The markets are now excessively brittle, as in the early 1970s.
Europe and North America, we are told, are less dependent on energy- intensive heavy industry than in the 1960s and 1970s. It seems we squeeze more GDP out of a barrel of oil than in those benighted days.
That may or may not be true, but the oil market is global: and nobody has suggested that rising populations and living standards in Asia and Latin America can be achieved without lashings of refined petroleum. What happens, as they used to say, when 100 million mainland Chinese exchange their bicycles for mopeds?
For what it is worth, I believe that world demand for crude oil and petroleum products is much higher than the markets believe, and has been concealed by the creeping increase in Opec production since the start of the year. But don’t bank on that: Opec itself is said to be anxious that strong spot markets merely conceal weak general demand and prices might collapse.
Fortunately, the European public still has one cushion against rising prices. That is the taxes that their governments have levied on oil products since prices began to decline in the early 1980s. As the Venezuelan oil minister, Ali Rodriguez, has complained, treasuries in the countries of the OECD skim off in taxes 60 per cent of what consumers pay for the final product, while crude oil producers are left with just 12 per cent. The fishermen, farmers and hauliers blockading refineries in the UK and western Europe are furious with their governments, not with Opec.
The OECD governments claim that those taxes are designed to curb hydrocarbon emissions, diminish atmospheric pollution and conserve a wasting resource. If any of this were true, then the taxes could be repealed and their job done by the higher crude oil price. The £4 gallon is a great aid to contemplating the fate of the planet.
The truth is that those taxes have nothing to do with the environment. They are opportunistic sources of general government revenue. If governments follow the lead of France and reduce the taxes, they must replace the lost revenue from elsewhere: from income taxes, for example, that fall not just on marginal communities of farmers and owner-operator hauliers, but on the electorate as a whole. Or forgo the revenue, which governments have not usually been eager to do.