What’s driving up oil prices?

As Hurricane "Katrina" ravaged the US south this week, the barrel price of West Texas Intermediate crude oil breached $70. The surge was a repeat of last year, when storms halted oil production in Florida’s offshore wells. WTI sweet crude, like Europe’s Brent, normally fetches higher bids, because easier and cheaper to refine. But Dubai sour, which the Philippines and most of Asia import, also pulled up in petroleum exchanges. From all forecasts, prices worldwide will continue rising. Why?

Fingers point to the usual suspect: China. The world’s most populous nation used to export diesel. Not anymore. Since its economy hopped onto the global merry-go-round in 1999, China’s oil consumption steeply has risen, straining the production of the Organization of Petroleum Exporting Countries. Today China buys all the oil it can get its hands on. And it does not rely solely on oil trading to augment its own insufficient production. Last month the state-owned China National Offshore Oil Corp. made a bid to gobble up California’s Unocal. Foiled by an outcry in the US Congress, a bigger state firm, China National Petroleum Corp., has set its sights on Central Asia, bidding to buy PetroKazakhstan.

Although its economy cooled a bit this year, China accounted for a third of the growth in world oil use since 2000. Its thirst for oil is not about to be sated. Progress is fast moving from port cities into inner villages. As more Chinese gain purchasing power, they will buy cars, appliances and goods that require oil both to make and to run. China’s oil consumption per person at present is only one-fifteenth that of an American or a European. But its energy demand will rise over the years with incomes, more so since it has a policy of subsidizing fuel for factory or personal use.

Subsidy is another culprit that economists criticize. Many emerging economies, like India, Taiwan and Thailand, shield big energy users with grants. Insulated from oil crunches, consumers tend to guzzle more oil than if they had to pay real world rates. To notch one dollar of GDP, developing nations burn twice more oil than industrialized ones. The IMF forecasts them to account for three-fourths of fresh world demand in the next five years. That includes habitual subsidizers Kuwait and Venezuela that mine their own oil.

Subsidy has become a political issue, internally and internationally. Indonesia, a producer, in June cut subsidies; rioting erupted. Argentina is able to keep its gas rates down 20 percent by passing off the difference to neighboring buyer Chile, which naturally is grumbling.

Speculators are also to blame for the prices. Traders started pushing up prices in 2003 when Saudi Arabia, OPEC’s biggest member, urged a hike in production quotas. Correctly reading the Saudi move to mean the using up of OPEC’s 10-percent idle capacity, they hedged on an immediate future of refining backlogs. Terrorist threats, strife in producers Venezuela, Russia and Nigeria, and Japan’s economic recovery gave traders and supertanker owners more reason to hoard.

Speculation is deemed fair in a world of carpetbaggers. Economists regard hedging as part of profit taking, especially since futures traders also enrich oil producers and refiners. Speculators have their own plush offices right at the New York Mercantile Exchange (for WTI), in London’s International Petroleum Exchange (for Brent), and in Dubai, Singapore and other lands for both crude and refined fuel. Their only punishment is the natural one – a sudden price drop that would shackle them with stocks made expensive by their own manipulations. The day of reckoning for oil profiteers is not in sight, though. Demand is predicted to continue rising, while supply tightens from low spending on exploration.

The Economist points a finger at a fourth culprit: the United States, which it calls an "oiloholic". America with its 200 million people, not China with its 1.2 billion, remains the world’s biggest oil guzzler, accounting for a quarter of world output. Like most of Europe, the US consciously had reduced its dependence on imported oil by 1.5 percent of GDP per year since the crunch of the ’70s. Too, its economy has shifted massively from fuel-intensive heavy industries to information technology and services. Still, its business growth in the past 30 years led to more burning of local and imported fuel, wiping out the planned reduction. Americans use oil for heating, cooling and touring as if world prices are not surging. The Economist notes, "America uses 50 percent more oil per dollar of GDP than the European Union, largely because consumers pay less." Retail prices have hit $3 a gallon, making American motorists groan. But their lot is better than Britons and Germans, who pay $6 per gallon because of taxes. "America’s (continuing) heavy dependence on oil not only leaves its economy more vulnerable to a supply shock, it also pushes prices higher for the rest of the world."

Economists counsel Washington to levy higher petrol taxes in order to discipline consumers. US politicians are unlikely to listen, though. America, unlike Europe, has always preferred fuel-economy regulation to taxes. Yet even in conservation measures, it has failed. Oil-efficiency of American vehicles has fallen in the last two decades. Last week the Bush administration unveiled new fuel-economy rules for trucks and SUVs, but critics wail that loopholes still allow these guzzlers to burn more gas than normal cars. It’s a concession to carmakers, they sneer, of a former alcoholic leading a nation of oiloholics.

Where does all this leave Filipinos? RP imports more than half of its fuel stocks. So far, what Filipinos are experiencing is a price crisis, as Dubai crude prices spike with WTI and Brent. But RP is short on foreign reserves needed to buy the black stuff. With the economy slowed by fiscal deficit and political fighting, the reserves could be depleted. And then, the oil price crisis could turn into a supply crunch.

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