Azerbaijan, Baku, Dec. 23 / Trend / Sameer Dossani, Director of the 50 Years Is Enough: U.S. Network for Global Economic Justice, former executive director of NGO Forum of the Asian Development Bank, specially for Trend
The past three years have seen oil prices rocket. What are the reasons for that surge in prices? First of all, consumption was high because industrial growth, especially in developing economies such as China, India and to a lesser extent countries like Brazil, Argentina, Indonesia and South Africa. Secondly there was a fear - and it's still not clear whether this fear was reasonable or not - that the world had reached "peak oil", that is the point where oil reserves start to run out. These are genuine supply and demand issues, and one would expect them to have an impact on oil prices.
But speculation has also played a role in the oil price boom. Six months ago, China was still predicting that it would grow by 10% per year for the next three years - India's numbers were also high. Investors saw these numbers, along with steady consumer demand in the U.S. and predicted that the price of oil would go up even further. Some large consumers even bought oil in advance so as to lock in the current price, predicting that it would continue to climb.
But with the bursting of the U.S. housing bubble and the subsequent decline in U.S. consumption, industrial growth around the world is threatened. The problem is not only that there is less demand at the moment, but also that there is less demand predicted for the next year or two.
So the price, which was boosted in part by speculation (and in my view unreasonable speculation), has dropped dramatically. OPEC has cut production three times in recent months to counter this, but these cuts have made little difference. These latest cuts will not make much of a difference either. The dependence of the world economy on U.S. consumption and the failure of the U.S. government to do anything about the housing bubble and the financial crisis in its early stages ensure that we will have a change in the global economy. Other countries, including China, India and even smaller countries will have to take steps to boost their domestic consumption, and this will mean meaningful investment in education, healthcare and other social infrastructure.
While such measures may lead to the rise of a new global middle class to replace the giant of U.S. consumption, these are longer term measures - they may not have an impact on oil prices for a decade. In the short term, oil prices may have fallen too much in their efforts to compensate, but if so, not by much. There may be some slight rise in oil prices, but then there will most likely be some stability, perhaps at the 2005 levels. There is little that OPEC or anyone else can do about that.
Lastly, low oil prices may be bad news for oil exporters, but it could be disastrous news for the environment. The latest scientific data on global warming is not encouraging, and fossil fuel consumption is the primary culprit. Let's hope governments are enlightened enough to a) substantially increase taxes on petrol, diesel, and electricity from coal so that fossil fuel use is curbed despite its low cost, and b) invest heavily in solar, wind, and other sustainable energy sources.
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