Steep oil price rise: A blessing in disguise

Gwynne Dyer, London

Some time this week or next, oil is likely to reach US$50 a barrel for the first time ever. The price is up by a third since the end of June, and US prices have set record peaks in all but one of the past fifteen trading sessions. This is a Good Thing.

It's certainly a good thing for the oil producers, who have seen the value of their oil exports eroded by the steady fall in the value of the US dollar. Even at $40 a barrel they were getting no more in real terms than they were a couple of years ago, when oil was trading in the high $20s, but at $50 a barrel they are actually seeing more money. It's less obviously a good thing for everybody else, but the best things often come in heavy disguise.

This isn't an "oil shock" like 1980, when the price of oil spiked at the equivalent in today's money of $80 a barrel after the Iranian revolution, and then slid back down after a year or so. It is a "demand shock," which is a much more enduring change. Thanks mainly to the rapid economic growth of China and India, there is now a market for every barrel of oil that the producers can pump.

Future demand is likely to grow faster than future supply for exactly the same reason. Most of the growth in the global economy used to happen in the developed countries, whose economies typically grow at two or three percent a year.

Last year, almost half the growth happened in developing nations: China alone added as much demand as the United States, and India added as much as continental Europe. Those economies are growing at seven or eight percent annually, and there is no way that oil production can be expanded fast enough to keep up.

As a result, oil prices will fluctuate much more wildly than before. If Iraqi production is disrupted by the uprising in southern Iraq, the Deutsche Bank warned recently, "it is not unthinkable that a second disruption (loss of some exports from Russia, for example) would push prices towards $100." If all goes well, on the other hand, the price could be back down in the low $30s by this time next year. But it is unlikely to see the $20s again.

Ever since 2000, the Organization of Petroleum-Exporting Countries (OPEC) has tried to keep the price of oil in the $22- $28 range, cutting production if it fell below that band and increasing output if it climbed above it. Now it has been well above that band for six months. "Our ministers realize they need to revise the price band, particularly given the changing value of the dollar," said OPEC spokesman Abdul al-Khereigi last week -- and speculated that the new band would be $25-$30 or even $26- $32.

The price of oil may never actually fall back that far again, and even if it does the long-term trend is clearly up. Why is that a Good Thing?

The main reason is global warming, which is coming on faster and harder than even the pessimists feared. In a system as complex as climate, all sorts of things change in unpredictable ways when you raise the total amount of heat in the system, and the worst changes are those that set up feedback mechanisms. Some of the changes we are observing now are very worrisome.

It was assumed, for example, that the rise in global temperature would be partly canceled out by a higher rate of evaporation from the oceans that produced more cloud cover. Instead, the higher temperatures seem to be burning the clouds off. And recent research suggests that the higher level of carbon dioxide in the atmosphere is stimulating the bacteria that live in peat bogs and greatly increasing the speed with which they dissolve the peat. The peat is almost pure carbon, and when it dissolves it turns into -- carbon dioxide.

If that turns out to be an runaway feedback loop, we are in serious trouble, for the peat bogs of the northern hemisphere contain the equivalent of 70 years' worth of global industrial emissions of carbon dioxide. New calculations suggest that we may be facing a global temperature rise over the next century not of 5.8 degrees Centigrade (10.6 degrees Fahrenheit), which would be bad enough, but as much as 10-12 degrees C (18-21 degrees F).

That would be calamitous, but key players in the world of politics and most of the business world (apart from the insurance industry) remain in denial.

The Kyoto accord is a good template for the global regulation of greenhouse gases, but the actual cuts in carbon dioxide production that it envisages do not begin to address the problem. The only short-term hope of slowing the rise in temperature is a steep drop in the use of oil and gas -- and the only thing that is going to make that happen is a steep rise in price.

It has happened before. Alternative energy sources take a long time to build, but energy conservation works relatively quickly: The big oil price rises of the 1970s caused the industrialized countries to bring in energy conservation measures that cut global oil consumption drastically. Twenty-five years of profligacy in energy use since then means that there is once again huge scope for rapid gains from conservation. It will only happen, however, if the oil price goes up and stays up.

The writer is a London-based independent journalist.