Wednesday 2 February 2011

Canute and the price of oil

It probably wasn’t Benjamin Franklin who first claimed that only death and tax are certainties, but it would probably be safe to add ‘rising oil prices’ to the list.
The reasons are obvious – rising world population, aspirations for a rising standard of living, finite supply, and increasingly difficult and costly extraction.  Even if we haven’t reached peak levels of production yet, we will do at some point (and it’s certain to happen before we reach peak levels of demand unless there is a rapid and radical move away from oil, which seems unlikely).  There will be price variations en route, of course, but underlying them is an inexorable upward trend. 
The problem, and the reasons, may be most acute and obvious in the case of oil, but there is a more general issue around energy prices.  As we move to more sustainable energy generation – rather than simply exploiting the apparently cheapest sources – all energy prices are likely to rise.
And we need to be clear – this will not just be an absolute increase in prices in line with inflation, we’re looking at a relative increase as well, meaning that energy is likely to take a higher percentage of disposable income for many if not all.
For a number of reasons – some of them quite similar – food prices are also likely over the long term to increase as a proportion of disposable income.
There has not, to date, been much by the way of an open and honest political response to these issues.  Some politicians still talk as though governments can and should ‘do something’ to control price rises – hence the reference to Canute in the title.  Canute, of course, sat in front of the tide to prove to fawning courtiers that he could not control it; I somehow doubt whether that is the objective of those who are calling for control of food and energy prices.
So, two absolute basics of life, food and energy, are inevitably going to take a higher proportion of our disposable income.  Most of our political leaders know and understand this, but rather than tell us how we should be preparing for it, they continue to talk as though governments can control the prices – they fear that honesty would lose them elections.  They might well be right on that final point, but that doesn’t make it a valid excuse.
What governments can do is change the way resources such as food and energy are shared out – with the aim, as an absolute minimum, of protecting the most vulnerable in society.  Sharing simply on the basis of ability to pay (aka ‘market forces’) will provide no such protection.  That actually means that the underlying problem also contains a real opportunity to move towards a more equal society – if we’re imaginative enough to seize it.


Spirit of BME said...

Mr Dixon,

You are right in saying that King Oil is going to with us throughout our lifetime and beyond. However, Markets do go up as well as down. Crude oil in 1984 collapsed to 10USD Bll and on a few days 8USD Bll.
I see that the price of Brent was at 102 USD Bll tonight, it will not stay there that long as the US will move and release strategic stocks as Iran start making money at 96USD Bll.
The peak we are getting is generated by “the boys in red braces” making money on the spread between Brent and West Texas crude created by the Egyptian scenario (although only 4.5% of crude goes through the canal.)

As for the “venerable” – not sure if this is modern speak for the “worthy poor “ and/or “stupid”, as J.Christ said they will always be with us, but masking their condition by handing out protection at certain market phases will only leave these sad and exploited people on the worst social drug of all – dependency.

HMG interference in the market will only prolong the pain of unaffordable food and oil prices, but I assume they will do that rather than have HM subjects hungry and out on the streets demanding regime change.

John Dixon said...


Completely agree that the variability of the price (which is overlaid on a long term upward trend) has a great deal to do with speculation rather than being a direct relationship with production costs. Perhaps if governments were serious about tackling the variability (which is a real short term problem for many) they'd do more to tackle the cause (speculation) rather than treat the symptom (petrol prices).