Oil

This week opened with world crude oil prices rising to $37 per barrel. There appears little to mitigate the price surge.

One oil industry analyst says that in the event of a major natural calamity or human catastrophe, it is conceivable that oil prices could go up to $100 per barrel. The reason for this is that demand continues to grow, seemingly immune to price levels, while oil production is close to its limits.

If a major war breaks out in an oil producing region, or if a major earthquake strikes a large oil field, there might be no unthinkable ceiling to oil prices.

Right now, the pressure on oil prices is attributed to the fact that this is the start of the stockpiling season for the northern industrial countries. The stockpiling is in anticipation of the normally higher demand for fossil fuels during the cold months in the northern countries.

But the strategic trends are not very encouraging, either.

Fossil fuels, which take tens of millions of years for nature to produce, are a finite commodity. They cannot be replenished anywhere near the rate we consume them.

The possibility for any major new oil finds is quickly diminishing – even as oil exploration has become a more urgent industry. We are drilling deep under the sea and in the frozen wastelands close to the earth’s poles. Hope for the discovery of new oil fields is quickly fading.

The greater likelihood is that our oil stock cannot be much more than the presently known reserves. That should be a cause for alarm.

Global oil demand is surging ahead, especially in fast growing, fast industrializing societies like China. More prosperous populations are buying more cars, taking more hot showers, using more oil for heating during winter and for cooling during hot summers.

That can only mean that our known oil reserves will be depleted faster than we care to imagine. As the depletion progresses, rising prices are unavoidable. That is the dictate of the iron law of supply and demand.

Economists have, furthermore, established that the consumption of oil – more than the consumption of any other commodity – rises disproportionately to any increase in income. If a population’s per capita income doubles, its consumption of oil will likely triple.

This is not hard to believe. An average family’s demand for oil dramatically increases the moment it buys a car. If that family’s income rises marginally, it will likely buy a second car, doubling its demand for oil.

After the oil shock of the early seventies, a new energy-efficient lifestyle came into vogue. Cars became more compact, exacting the most power for every liter of fuel consumed. Architecture became more sensitive to efficient energy use, making natural lighting and heating more optimal.

But that did not bring down global demand to oil. This is mainly because developing societies, as they became more prosperous, simply added to the total demand for oil.

I do not have the exact figures, but it should be easy to imagine that the number of cars in Philippine roads today is in multiples of the number of vehicles on the road during the first oil shock over 30 years ago.

What can we do about the prospect of rising oil prices?

Well, basically nothing much.

We can try to make an effort to plan our trips better, use mass transport more, consume less power in our households and rely more on other gifts of nature. But the impact on demand will likely be limited.

We want our country to progress. We want our economy to grow much faster so that more people will be lifted out of poverty. That entails accepting higher oil consumption with more industries with large appetites for power and more households with more amenities that consume power.

The standard response of the know-nothing leftist groups each time oil prices are adjusted to reflect the rising cost of crude is to hold raucous street demonstrations demanding that government mitigate the costs of a vital – and imported – commodity. They peddle to the hard-pressed masses the snake oil of re-nationalizing the oil industry as a solution to the rising prices of oil products.

They are being unfair to our people, pushing them towards stupidity rather than enlightenment.

It is obvious that the rise of oil prices is due to the rise of crude prices in the world market. Re-nationalizing the oil industry will not solve the root cause of the price movements. It will only enlarge the damage by pushing the problem under the rug.

If we re-nationalize the oil industry, we will return to a regime where oil pricing becomes a highly politicized process. The prices of oil products will be determined more by what people want to pay for them and less by the actual costs of the commodity.

What people want to pay is always less than what it costs.

That, we know from past experience, is a very dangerous thing. By posting fictional prices, subsidized by the public sector, we do not encourage prudence in the use of a scarce and imported good. By not immediately reflecting the real costs of crude in the global market, we force the public sector to cough out subsidies, taking money from education and health care to pay for impudently consumed oil.

Large subsidies for oil, when they force bigger public deficits and larger public borrowing, have greater inflationary effect than simply paying the right price. They are unjust because the rich, who consume more oil, enjoy a greater share of the public subsidy – while the poor, who consume less oil and are more dependent on social services, are ultimately hurt the most when public funds are diverted to subsidize a disproportionately consumed commodity.

The pseudo-nationalist leftists, infatuated with subsidies and nationalized industries, just don’t get the point.

But it is a waste of time to debate with those enamored with Red Guard-style "know-nothingism."

Our time will be better used and our future better secured if we devote our efforts putting together a national strategy for energy efficiency in a world quickly running out of oil.