Nonsense, nonsense, nonsense: the myths about high oil prices

The Sunday Telegraph ^ | April 30, 2006 | Niall Ferguson

[MadIvan]

The British call it petrol, Americans prefer gasoline. But whatever you call it, prices at the pump are soaring. Last week gas hit $3 a gallon in some parts of the United States. To which British motorists can only reply: Diddums.

Driving down the M40 on Friday, I passed petrol stations selling regular unleaded at 97.9 pence per litre. That works out at $6.62 a gallon. If a British outlet offered petrol at American prices - 44 pence a litre - there would be a queue from Beaconsfield to Birmingham.

It's no great mystery why the British shell out more than double what Americans pay to fill up their cars. For years the United Kingdom has levied much higher taxes on fossil fuels than the United States. So if British motorists want to blame someone for the high cost of motoring, they know where to start.

Of course, it's not Gordon Brown's fault that the underlying price of petrol has risen steeply since he came into office. Crude oil futures hit a record price of $75 a barrel last week. That's six times the price that producers were asking back in December 1998.

So who's to blame for higher oil prices? This week, we have heard nearly all the usual suspects fingered, along with some new ones. "We are dealing not just with normal supply and demand economics," Lord Browne, the chief executive of BP explained in an interview. "Financial activity in the oil markets" was driving prices up, one of his colleagues explained, a thinly-veiled reference to hedge funds.

American politicians offered a less subtle story. Leading Democrats blamed President Bush for being too "cosy with the oil industry". Those who previously argued that the Bush administration invaded Iraq to make oil cheap now argue that it was in fact, er, to make oil dear.

The Chancellor? The hedge funds? The oil companies? I'm surprised someone hasn't yet blamed the Deputy Prime Minister, John Prescott, who famously keeps two Jaguars - one (it now turns out) for each of the women in his life.

This blame game is a farce. The price of fuel is high precisely because of "supply and demand economics", as Lord Browne knows only too well. Global demand for oil has risen by around 40 per cent in the past 20 years. As so often in world economic affairs these days, a crucial role is being played by China. In the last five years, the G7 countries have accounted for just 15 per cent of the growth in global demand; China has accounted for twice that.

Soaring demand is coinciding with stagnant supply. Global refining capacity has scarcely grown and took a big knock from last year's hurricanes. Meanwhile, political instability in some of the world's principal oil producing countries - Iraq, Nigeria and Venezuela - has made commodity traders and intelligent investors legitimately pessimistic about future supply. And let's not forget the possibility of US air strikes against Iran. It's hardly "speculation" to bid up the price of oil futures. Only a fool is "short oil" these days.

Could we be about to relive the 1970s, which was the last time oil prices were this high relative to other consumer prices? The good news is that, thanks to increased efficiency and reduced industry, the G7 economies are much less oil-dependent than they were back in the days of kipper ties and bell-bottoms. Nor are high oil prices likely to bring back the stagflation - low growth plus high inflation - we saw in those dreary days.

Some analysts even argue that high oil prices are good, on the principle that they send a signal to producers and consumers that it is time to seek new sources of energy. But this is another piece of nonsense.

There are two problems with high oil prices. The first is political: they enrich the wrong people. "Naturally Iran is happy," the Iranian oil minister was quoted as saying by al-Jazeera last week. "High prices make any supplier happy." Well, anything that makes the regime in Teheran happy is bad in my book.

But the much more serious problem is environmental. Here, I have to dissent from the fashionably contrarian view that global warming isn't happening or doesn't matter. For 400,000 years, the world's atmospheric concentration of carbon dioxide (CO2) fluctuated between 180 and 280 parts per million (ppm). Last year it reached 380 ppm. The evidence that global temperatures are rising as a result is incontrovertible. True, no one knows exactly what the effects on the world's climate may be. But, once again, only a fool thinks there will be no effects.

The trouble is that high oil prices are not a signal to mankind to do anything about CO2 emissions. On the contrary, they are as much a signal for oil companies to exploit hitherto non-viable deposits of hydrocarbons, such as Canada's tar sands. At the same time, high oil prices do not deter people from buying gas-guzzling cars. Indeed, the demand for Sports Utility Vehicles like the monstrous Hummer seems to be (as economists say) "price-inelastic". Better-off Americans are still buying Hummers even with gas at $3 a gallon.

It's easy to see why. If you drive as much as Americans do - it's a big country and people commute long distances to work - you want to be comfortable on the road. The SUV is in fact a kind of hybrid - part vehicle, part living room. Unfortunately, the market is only as far-sighted as consumers. If people don't believe that global warming will affect their lives - and polls show that they don't - then the risk of climate change simply isn't priced in.

So what is to be done? Is there a better way to propel ourselves around than sucking oil out of the ground, refining it and setting it alight in internal combustion engines? The answer is yes.

I've often agreed with Homer Simpson that alcohol is the solution to (as well as the cause of) most of life's problems. In this case, alcohol really is the answer - to be precise, the form of alcohol known as ethanol, which is distilled from plants such as sugar cane.

Unnoticed in the northern hemisphere, one country is pioneering a transportation revolution by switching from petrol to ethanol. That country is Brazil. Today, ethanol accounts for 40 per cent of all automobile fuel in Brazil, while 80 per cent of new Brazilian cars are flexible-fuel cars that can run on either petrol or ethanol.

In theory, such "biomass" fuels - derived from carbohydrates not hydrocarbons - could replace nearly all of the world's oil-based transportation fuels. There would be some environmental costs to such a switch, no doubt, but it would radically curtail CO2 emissions.

What's preventing the northern hemisphere from following Brazil's lead? The answer is not so much Big Oil - though American oil companies have fought tooth and nail against the introduction of ethanol, even as a fuel additive - as Small Agriculture. To protect northern farmers, huge tariffs are currently imposed on imports of Brazilian-produced ethanol by both the United States and the European Union.

Yet not even a world of perfect free trade would convert humanity to more prudent forms of propulsion. Tax incentives are also needed to encourage people to buy flexible-fuel cars.

And if you want to know how to pay for those tax breaks, just ask Gordon Brown. British-style taxation of gasoline won't stop Americans from driving Hummers. But it could help finance a transition to the car of the future: Green Hummers that run on booze.

[Mr. Silverback]

I think petrodiesel, then a transition to biodiesel, is the answer.

I may have a conflict of interest here (I am managing editor of an agricultural trade magazine these days) but I agree. I've seen figures that indicate that we could not convert to ethanol or any significant mix of ethanol even if we converteds all our arable land to corn. On the other hand, you can make diesel out of almost anything that has plenty of carbon. Here's a post from a blog I contribute to occasionally:

Alternatve energy news from NRO Online, just for a chuckle

RENEWABLE ENERGY BREAKTHROUGH! [Cosmo ]

Important news! Don't let the mainstream media censor it:

 

A German inventor says he's found a way to make cheap diesel fuel out of dead cats.

Dr Christian Koch, 55, from Kleinhartmannsdorf, said his method uses old tyres, weeds and animal cadavers.

They are heated up to 300 Celsius to filter out hydrocarbon which is then turned into diesel by a catalytic converter.

He said the resulting "high quality bio-diesel" costs just 15 pence per litre.

Koch said the cadaver of a fully grown cat can produce 2.5 litres of fuel - meaning around 20 cats are needed for a full tank.

He said: "I tank my car with my own diesel mixture and have driven it for 105,000 miles without any problems."

Annelise Krauss of the Dresden Animal Protection Association blasted Koch's new diesel though, saying: "This is as bad as experimenting on animals."

 

Update on Friday, September 23, 2005 at 12:41AM by [Your Name Here]

Wow! We've gone from "Put a tiger in your tank" to "Put a tabby in your tank!"

Sorry,  I just couldn't resist.

Christopher

_________________________________________________________ Of course, Annalise Kraus shows just how dumb you have to be to be a hardcore animal rights activist. The moron apparently doesn't even know that dead things don't experience pain.

[listenhillary]

Imagine a paper shredder-cum-still at the office

I tried imagining it. The image was disturbing. ;?)

[Mr. Silverback]

The SUV is in fact a kind of hybrid - part vehicle, part living room.

I don't care who you are - that's funny!

When my bro-in-law bought a Hummer, I walked into the family Christmas party and announced in my parade ground voice, "Attention to the owner of the tan house, license number A123456, parked in our lot. Your lights are on."

[AlexW]

"LOL. This guy would have a great future in american politics."

I looked up my notes from this week.
He makes 70 Euros per 1000 ltrs ( about 40 cents per gallon)
That is GROSS profit. From that comes ALL expenses of transportation, and cost of operating the stations.
In Austria, just a few km from here, they gross 90 Euro per 1000 ltrs. We can assume that they might make a net of maybe 10 Euro per 1000 ltrs of gas.

[GSlob]

"Imagine a paper shredder-cum-still at the office
I tried imagining it. The image was disturbing. ;?)"
Well, maybe it should have the built-in chiller and a vending machine tied into it, so that vodka comes out chilled and one could get a pickle or a sandwich as well. But that would be a luxury model.

[Mr. Silverback]

We are not paying much compared to the Carter oil crisis, and to reach the equivalent, crude would have to be at $90 per barrel.

We are not paying diddly compared to Europe, as this article points out.

The oil companies are making 9 cents a gallon in profit on gas.

Sure sounds to me like Limbaugh is right. We are at or near the top of the high demand/low supply wave, and we will soon start down toward the high demand/high supply trough. The wavelength on these cycles is about 25 years.

[P.O.E.]

I have an innate talent for solving several problems simultaneously. With all the drunk-driving laws, I do all my drinking at home, thus saving on gas.

[Mr. Silverback]

No, taxing is not the solution.

[Mr. Silverback]

And kindly note, and note well-- the first reply to this post ( when gas was $1.45 a gallon ) was derisive... so, who's laughing now?

Not I! Your points are excellent.

[Eye of Unk]

And I thought the real reason of the high gas costs was to put the mindset of the US into believing its all Irans fault and that if we go to war with Iran, invade and topple the regime like we did in Iraq the price of fuel will magically go back down.

I guess I must still be eating stupid food.

[Ghost of Philip Marlowe]

The reports I have read indicate that it requires far more energy to produce biodiesel than it produces, and far more than it requires to produce gasoline.

If you don't believe in global warming (as being caused by Man's activity) what's wrong with gasoline? With catalytic converters, exhaust is almost entirely CO2 and H20.

[slowhandluke]

Would an economic model suggest that, since the price has increased sixfold in the last eight years, the supply should have declined sixfold during the same period? I don't buy the argument that global demand is driving prices up without a significant reduction in supply......

It's a ratio problem, price is related to the ratio of demand over supply, though not linearly. It doesn't matter if the supply goes down or the demand goes up, or both. Either will increase the ratio of demand over supply which will drive the price up.

[marblehead17]

ping

[Mr. Silverback]

The only thing wrong with gasoline is the places it's being pumped out of the ground these days.

[Slings and Arrows]

:^D

Very good!

[backhoe]

Your points are excellent.

Thank you- I do appreciate that.

[norraad]

Pre-saxly, we have as much crude in the ground as the "evil-doers" do.

Someone high up, related to crazy King George the III, knows this ,oh, so, well.

This whole thing is being manipulated by powers that be who kiss towelheads on the lips & other places.

Ok, Bushbots, Rushpots, & 'tards,etc., flame away.

[fabian]

the thing that I don't get is that he says the high prices are a result of supply and demand but demand hasn't gone up that much in the past month or two has it? I mean we went from around $2.00 to $3.25 very fast.

[norraad]

Well, when you listen to exspurts, you have to look at the word itself.

EX = is a has been, SPURT = is a drip under pressure.

[hosepipe]

The price oil in England is exactly the same as the price of oil in the U.S.... Its taxes that is/are the difference.. Predatory, parasitic taxes.. Taxing any energy in any form punishes "the People", especially poor people.. Its a punishment predatory and parasitic.. Other than that the price of oil and products produced from oil is supply and demand..

Any economy is punished by predatory taxes.. and ANY tax on any form of energy is parasitic.. But then Slavery by Givernment is parasitic, socialism is parasitic, and most in URP and increasingly in the U.S.. socialism is viewed as beneficial.. when its parasitic..

Taxes on energy, any form of energy and products made from that energy saps the energy of that economy.. and punishes the People.. that ultimately pays for everything. Givernment OWNS nothing, all givernment has is what it TAKES from the people.. by parasitic means.. by taxes.. BUT taxes on energy ANY energy saps the very economy of that givernment...

Tax other things, but taxing energy is quite STUPID... and is counter-productive.. even for the givernment..