Some crude realities

Crude petroleum prices have gone up 11 times in nine years, four times in the last five years, and doubled in the last year.

Crude petroleum prices have gone up 11 times in nine years, four times in the last five years, and doubled in the last year. The cost of a barrel of oil has increased like never before and it appears it will increase further. Some fear it will cross the USD 200 a barrel within the year, though the consensus among forecasters appears to be in the vicinity of USD 150. As petroleum becomes more expensive, inflation is spreading throughout the world economy, land is being diverted from production of food to energy crops, and economic growth is being impacted adversely across the world. Most important, there is no end in sight. Many believe that petroleum prices will continue their northward trajectory for some time to come.

The current explosion in petroleum prices started in about 2003, around the time the US invasion of Iraq occurred. Iraq is, of course, one of the largest crude oil producers and has among the highest reserves. With the lack of a stable government in Iraq, and consequent unrest, supply uncertainties contributed to the rise in oil prices. Around 2003, the international economic boom strengthened, and it became quite clear that countries such as India will soon join China in becoming a large user of petroleum products. All in all, therefore, uncertainty and fear of supply constraints combined with sustained rise in oil consumption led to this rapid price rise.

Something like this happened before 8212; in the OPEC-led price jumps of the 8217;70s. The international economic boom following World War II was leading to a rapid increase in energy consumption. Crude petroleum consumption was growing rapidly and it seemed nothing could affect the world8217;s insatiable need for petroleum. The OPEC cartel with perhaps some help from the US then ramped up crude prices. For a while, crude consumption continued to go up even though prices were increasing. Economists wrote tomes on how petroleum consumption was not sensitive to prices. For all of the 8217;70s and some part of the early 8217;80s, prices rose, consumption rose, and the world went through its most intensive case of stagnation cum inflation.

This is what is happening and will continue to occur for a while. Governments are resigning themselves to a high inflation condition for a while, most analysts are lowering their economic growth expectations, and we are all thinking of action points for this new high inflation-high energy cost-economy.

Countries across the world are dealing with the price rise in different ways. Some such as the US are diverting crops from one use towards energy and ethanol from corn. Many others are increasing research and investments in other non-conventional energy sources. Still others are putting in efforts to scout for more petroleum sources. And almost all are trying to put in place mechanisms that will enable greater efficiency in energy usage.

The net result is that what decades of international agreements, Nobel Prize winning documentary makers and NGO leaders could not achieve, is being achieved. Most of the newer technologies appear to be more environmentally friendly and many more technology advances are expected in the next few years as greater R038;D occurs.

In other words, the rise in petroleum prices is forcing individuals, companies and governments to either use petroleum more efficiently or use something else for their energy requirements. At high enough price levels, many technologies that were otherwise non-economical have become viable. And the risk-return parameters also now favour greater experimentation with new sources of energy.

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High petroleum prices are leading to greater experimentation on all three fronts 8212; generation, transmission and storage of energy. Sources such as biomass, nuclear, geo-thermal, solar, and wind are increasingly looking more and more attractive. Transmission technologies are improving in many different ways with much lower transmission losses and some movement is also being seen on research in wireless transmission of energy imagine putting all of power generation in outer space and merely transmitting the energy generated. Batteries are getting lighter and cheaper and are expected to also become less environmentally damaging in the near future.

All in all, a silent technology revolution is occurring across the world. This is thanks to the high petroleum prices.

History has shown that we do not run out of any commodity. As a commodity appears to get scarce its price rises, it automatically creates incentives for finding substitutes and more efficient ways of using the commodity. Eventually the substitutes may even become more important.

The same will happen to crude. It has become more expensive as it should. The world is looking for ways to find appropriate substitutes as well as use what is available more efficiently. Crude prices might rise more for a while and they might also stay at those levels for a few years more, but they will not continue to go up indefinitely. The more they rise now, the more they will stagnate or go down later.

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And so we will never really run out of crude. We will just stop extracting it 8212; for it will not remain an important enough source of energy at those price levels.

This crude oil price increase therefore needs to be welcomed. It will finally free us from our over-dependence on this polluting and unequally distributed energy source. Lowered international economic inequality, fewer wars in the Middle East, lowered greenhouse gases 8212; are only some of the long term benefits. And a few years8217; lowered growth or higher inflation are a small price to pay for this.

But all of this fails if governments do not fully pass on the price increases to the consumers, for no such incentives are then created. And in that case, we may actually run out of crude.

The writer heads the economic research firm, Indicus Analytics laveeshindicus.net