Bill Emmott - International Author & Adviser


Economic recovery, liberalism and the oil price
Corriere della Sera - August 25th 2009

Economic recovery is gathering pace, or at least evidence, all around the world, even if neither Italy nor Britain have yet matched the positive GDP data seen in France, Germany and Japan. It is bringing with it two surprising features. At least, they are surprising compared with many pundits’ expectations a year or even six months ago. One is that liberalism, along with the emphasis on market forces rather than state interventions, is alive and well. The other surprise is less pleasant: it is that recovery is occurring with oil prices already at $65-70 a barrel, which is double their level as recently as March and seven times higher than a decade ago.

            The survival of liberalism, and of globalisation in general, should not be surprising, even though many predicted or advocated its demise. Even if you want an interventionist, active state, the public finances of all the rich countries cannot support it. Banks have been nationalised or supported by public capital in countries as diverse as America, Britain and Germany, and so have car manufacturers. But all those countries want to sell their shareholdings as soon as they can, to reduce their public debts. A new wave of privatisation is bound to occur, even beyond the recently nationalised firms, if these debts are to be brought under control.

            Moreover, globalisation remains strong because all the most powerful countries are praying that a revival in world trade will come to their rescue. Thanks to that, and to the treaty-based rules policed by the World Trade Organisation, there has so far been remarkably little protectionism in response to this crisis. The danger has not gone away, for unemployment is still rising in both Europe and America, which will put pressure on politicians to find solutions, even bad ones. But the experience so far suggests that this danger can be resisted.

            The high price of oil is a different story. It has doubled since March not because oil demand has soared. In fact, research by Banc of America Securities-Merrill Lynch in London shows that global oil demand is still about 3m barrels a day (or 4%) lower than it was in early 2008, and the bank does not forecast it to overtake that early 2008 peak until 2011 at best. No, the explanation is not demand but supply: a deliberate policy by the OPEC oil-producers’ cartel, supported by Russia, to reduce production.

            The OPEC countries produce about 35% of global oil supply; Russia adds a further 11.5%. Compared with other, non-OPEC producers, however, the Arab countries that dominate OPEC can more easily raise or lower their output, and they possess the world’s lower-cost oilfields. So while global oil demand has dropped by 3m barrels a day, they have cut their own output by 5m barrels a day (or 15%) in order to keep prices high. And they have blocked investment by global oil firms in their reserves, driving them to higher-cost locations.

            Unless the OPEC countries, led by Saudi Arabia, decide to become less greedy and to raise their output in order to push prices down, three consequences will follow. The first is that economic recovery, already burdened by expectations of higher taxes, will be slowed further by high-cost energy. The second is that oil-producing countries like Russia and Venezuela will become even more troublesome politically, as high prices refill their treasuries and revive their confidence. The third, however, will in the long term be more benign: this will give a huge push to research and development of electric cars, solar power, nuclear power and all other substitutes for fossil fuels.

            At present, most forecasters do not expect electric cars and non-fossil-fuel energies to have much impact until the 2020s or 2030s. Sustained high oil prices, however, will bring this impact much sooner. That is also an effect of globalisation and relatively liberal markets: right now, there are hundreds of thousands, perhaps millions, of scientists and engineers in China, Japan, Europe, America and elsewhere who are dying to be the ones to bring about a transformation in energy and transportation technologies. Just as consumer electronics, computers and mobile phones were transformed far sooner than most people expected, the same could prove true of cars and of energy—if OPEC continues to demand high prices for oil.



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