This story is part of my new Countdown to $200 oil series, which is
the successor of my earlier, and now terminated by reality, Countdown
to $100 Oil series.
As in previous years, I got my ass whipped in my latest attempt to
suggest on Daily Kos that gas taxes should be increased, despite the
fact that the place is completly dominated by Obama fans and Obama's
solid stance against the gas-tax holiday.. Some commenters kindly
called me a "rich elitist **** from Europe" (guilty on all counts, of
course) for wanting to bankrupt poor Americans who cannot do without
gasoline, preferably cheap, and are already struggling mightily.....
And that was despite my acknowledging upfront that a gas tax increase
is politically deadly, and highly regressive, and my corresponding
suggestion to make it part of a plan to (i) directly sup****t those
hardest hit by revenue transfers and (ii) use the money raised to
invest in alternatives (public trans****t, renewable energy)
Of course, the fact that oil prices are reaching new highs almost
every day these days might have given them pause for thought. As might
this, which further underlines that this is not a short term
phenomenon:
Oil moves above $120 mark
The entire WTI futures curve is trading well above the $100-a-
barrel level with the longest dated contract for December 2016 up
$1.57 to $110.55 a barrel on Monday, signalling the market=92s consensus
that $100 oil is here to stay.
Oil prices are going in one direction only, and there's a very simple
reason for that: market forces.
Market forces say that when demand is growing, prices will go up,
which will encourage new supply to be provided, and some demand to be
discouraged. But oil is a very atypical market right now:
* demand is growing in China and other places, as lots of people
reach the income level that makes it possible for them to afford cars;
* demand is growing in oil-producing countries, as the oil bonanza
of the recent few years brings them prosperity and massive growth in
car owner****p and economic activity;
* a number of countries, including those oil-producing countries
that just have to dip in their production to fulfill demand, and many
countries that try to sup****t their citizens, further encourage oil
demand via price controls or subsidies (their consumers are not
subject to market prices and thus are directly unaffacted by them,
even if their government are);
* meanwhile, supply growth, which used to be the easiest way to
balance the market in the presence of strong demand growth, is no
longer happening. Production has been flat for the past 3 years and
there are increasing doubts that it can increase in the coming years.
Whether this is because of peak oil, because of lack of investment, or
because of political games by oil-rich countries is essentially
irrelevant: the fact is that supply is not responding to increasing
prices.
With growing, and largely price insensitive, demand on one side, and
flat supply on the other, something has to give. Price increases are
not the only consequence: they have to bring about market equilibrium.
And given the above constraints, it can happen only by causing demand
to shrink elsewhere, ie in the US, Europe and the non-emerging parts
of the Third World.
Oil im****ting countries in the poorer parts of the world are suffering
mightily from higher prices, and limiting their consumption, but the
overall volumes are too small to make a big difference. Letting Africa
slowly die is not going to be enough,
Thus Europe and the US have to bear the brunt of demand reduction. But
here's the problem: our demand is not very elastic either, and we
either have to do without our cars, or be willing to pay a lot more
than now for the convenience of driving them. But demand must shrink.
So what happens?
Well, it's simple: prices have to go high enough to destroy demand.
Given that we really don't want to do without our cars, the pain has
to be bad enough to actually cause (undesired at lower prices) changes
in behavior. Thus, VERY high prices.
One would expect such high prices to also bring online a lot of new
supply, including from unexpected sources. It is happening a bit
(biofuels being one exemple, coal-to-liquids another), but nowhere
near the scale it's needed. It appears that demand destruction in the
West is still, at current prices, the easiest way to actually balance
the oil market, however unlikely that may seem, and however painful it
is for us.
But given that Chinese demand is growing by 5-10% per year, and that
Saudi, Iranian or Russian ex****ts are dropping (as their production
stagnates and their domestic demand continues to jump), we need to
destroy yet more demand each year.
Thus, higher prices will happen. It's inevitable.
Well, there is an alternative, actually: shortages and rationing.
Maybe that will create the urgency that the current situation seems
unable to create yet.
And maybe we'll start having an energy policy that works, rather than
one that does nothing and lets the poor gets slowly squeezed with no
hope of any solution in sight.
Posted by Jerome a Paris on May 8, 2008 - 9:59am in The Oil Drum:
Europe
Topic: Demand/Consumption
Tags: $100 oil, $200 oil, gas tax
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