NPR’s Marketplace called me today for comments on this bizarre Financial Times article: “Opec to seek assurances on oil demand.”
Apparently these absurdly rich countries — with projected revenues of $658 billion this year — who are selling their product at nearly $100 a barrel, are threatening not to invest in new production unless the consuming countries promise to maintain demand. Seriously! No, seriously:
Opec will this week seek assurances from some of the world’s biggest oil consumers that they will maintain their demand as the members of the oil cartel come under intense pressure to boost investment in production capacity.
This is the dumbest thing I’ve ever heard, which is saying a lot considering who our president is. First off, who exactly can speak for the consuming nations and make a binding promise to keep up demand in the face of record-breaking prices? Nobody. This is capitalism. If high prices lead to fuel-switching, how could, say, President Bush, promise to stop it — especially since he has already promised to encourage fuel switching?
Second, as I blogged recently, pretty much every producing country, except Saudi Arabia, is producing flat out. Yet demand keeps going up even at these prices. If OPEC is really worried about demand destruction, then they should want to invest in as much new production as quickly as possible. Indeed, the IEA predicted back in July that the world will see “increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012.”
Third, IEA projects global oil demand will “expand by 1.9 million barrels a day, or 2.2% a year on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year.” OPEC would be crazy not to invest in as much new supply as they could to meet this demand. Where is a better place for their money — holding dollars?
So what is the real motive behind this bizarre threat? And how is the normally dependable Financial Times confused?
Let’s start with the FT, which writes:
Consumer countries, in particular the US and in Europe, are investing in alternative sources of energy, such as biofuels and nuclear power, and energy-saving measures to reduce their dependency on crude oil and combat global warming.
Some Opec countries are worried such moves could jeopardise future demand just as they embark on expansion plans. “The declaration will be a statement on oil relations as seen by Opec,” said one cartel source, referring to a draft of the statement.
Well, first off, nuclear power doesn’t substitute for oil in most countries, certainly not the West, since we don’t burn much oil to make electricity. Why? It’s too damn expensive! [Note to the FT: Please stop including “nuclear power” among the “alternative sources of energy” — it has been a leading source of energy for decades now.]
Second — and it isn’t clear just who is confused here, OPEC, or the FT, or both — but alternatives and efficiency take a long, long time to kick in, assuming they are even adopted. Heck, even with nearly $100-a-barrel oil, the Congress may not deliver the president an energy bill with an increase in fuel economy standards — and Bush may veto it anyway — and that increase would be so wimpy that it at best it will slow our demand growth.
I’m a little surprised the FT bought OPEC’s bizarre public explanation for its threat. A much more likely explanation for the threat is that OPEC is sending a warning to alternative fuel providers — and those who finance them — that they are prepared to increase production enough to crash prices and render the alt fuels uneconomical. Since I don’t think OPEC has the ability to increase production that fast, I think it is a meaningless threat, but I suppose it could have some impact on those companies who don’t read this blog or are otherwise poorly-informed.
I don’t think $100 a barrel is enough to get our leaders off their butts and onto the serious task of getting us off of oil. Only a genuine recognition of the threat posed by global warming has any chance to do that.