Around the world, recent times have seen, numerous demonstrations, strikes and marches concerning what some people call the high price of oil. Protests have erupted in Indonesia, deaths have been reported in Iberia and supplies in certain supermarkets in Europe are dwindling because of workers striking due to the oil price increases.
Oil and finance ministers all over the globe are holding summit after summit, trying to find a solution to the mounting price. Many of them are asking OPEC and Russia to increase production even more. Such a request is a double-edged sword for the producing countries. If they increase oil production too fast, then they risk repeating the scenario of the 1986 oil glut crisis when a slump in oil prices continued until the 1990 Gulf War.
The truth is that oil barrels are only worth what the next buyer is willing to pay for them. But oil isn’t just any commodity – it is one of the most important ingredients used in the industrial and developing world. This is precisely why it is viewed as a huge financial opportunity by many around the world who are seeking to add oil investments to their investment portfolios.
Oil extracts are used to manufacture plastic, without which there would be no toys for your children and no laptop for you to work on. Without oil, there would be no asphalt for your car to drive on, no wax to store goods and no travelling to work or to visit family and friends.
Without oil’s derivatives, there would be no soap or detergents, no medicine bottles, and no long-life canned food which is why fuel oil distributors are trying to offer alternatives to keep these items in production. The most famous photographs would not have been taken or stored, buildings would not be colored since dyes are only derived from oil, perfume would not exist and 80 per cent of world trade would stop because bunker fuel would not exist.
Food production would also suffer, as pesticides and fertilizers would not be produced. Greenpeace activists wouldn’t be able to cycle to their protests because there would be no rubber for their wheels. We wouldn’t be able to listen to the Beatles, Elvis or Maria Callas because LPs, CDs and cassettes would not be produced to store their mu it. Basically, the entire world as we know it would cease to exist.
Today, oil supplies are a direct victim of the rise of Asia, just like they were during the rapid development of the western world in the early 20th century. The industrial world must not give in to the demands of the protesters to artificially fix and subsidize oil prices and must draw a lesson from none other than former OPEC member Indonesia, which has suddenly decided to raise oil prices at the pump by 30 per cent after many years of artificially fixing prices to accommodate proletariat requests that ended up costing the country up to US$ 10 billion a year.
Frankly, nothing the G8 does is going to change the fact that oil was being sold too cheap for too long. There were no emergency G8 meetings to alleviate the economic hardships on the GCC and OPEC countries when oil was selling at single dollar digits, far below the break-even point at which the UAE stands at US$ 25, Saudi Arabia at US$ 30 and Kuwait at USS 17 per barrel. No energy ministers, let alone heads of governments from Europe, visited Riyadh or Abu Dhabi to reassure us that oil prices would increase. In fact, there seemed to be no incentive for OPEC to increase investment in oil production.
In 2007, the world consumed and produced 85 and 81 million barrels of oil per day, a five per cent discrepancy on the consumption it. The solution for the western world is simply to produce more. That clearly cannot happen because the OPEC producers can’t drill for oil, refine the product, sort out the pipelines and ship fast enough.
There is also the small issue of oil being a finite resource. Unlike our blatant disregard for oxygen when we tear down entire rain forests without the inconvenience of oxygen price hikes, oil is a different matter altogether. We cannot continue to consume a finite resource and find more uses for it to sell products to billions of people without expecting its value and price to rise fast.
With lower oil prices, producing plastics would be cheaper and people would travel more often and consume more ferociously, thereby polluting more and damaging the environment even faster – possibly irreversibly. China has shown us that it can produce such inexpensive goods in spite of the current high oil prices. What will the world look like if oil falls to US$ 9 a barrel once again?
The best thing that could happen for the future of this planet and its inhabitants is for oil to remain high. Oil at US$ 200 a barrel? Bring it on.
This article originally appeared in the July 2008 issue of MONEYworks. (PDF Download)