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In the previous posting we have looked at the oil supply to demand as the main cause of the current price rise. In a standard situation, when demand for a commodity exceeds supply, the normal reaction is for supply to increase. Since there is still plenty of oil to be pumped out and certainly a large amount yet to be discovered, the current price spike, in normal circumstances, should not last. There is however, a major complicating factor - the oil market is no longer an open one driven by supply, demand and price, as it was for the first century of the oil industry. With the bulk of oil reserves now controlled by governments rather than private corporations, oil has gone from being a commercial commodity to being a national strategic asset. Between 80 and 90 % of known oil reserves are now controlled by state-owned such as ARAMCO, GAZPROM, PETROBRAS, PETROCHINA and many others. The most promising prospects for new discoveries are also within nations where the oil industry is under government control. The prime drivers in the market are thus no longer the commercial ones such as market share, revenue and profit, but instead the strategic interests of the countries owning the reserves. In this respect the priorities of governments differ fundamentally from those of the private corporations which are collectively referred to as "Big Oil". Governments are only tangentially interested in profit. Their first priority is power, and their planning horizon is long-term. Because oil is essential to the modern economy and to modern warfare, a state sitting on large oil reserves derives from them both economic and strategic power. That power will last as long as there is oil in the ground within the national territory. A state which wants to maintain its power will therefore be inclined to leave as much oil as possible in the ground - unlike a corporation which will want to pump it out and sell it so as to show revenue and profit for the current quarter or year. The second priority of government is to maintain or, preferably, increase revenue so as to support its budget. The majority of oil-producing states (with the exception of the US) use their oil revenues for that very purpose: to finance ongoing government activities and, whenever possible, to create reserve funds for future needs. Combining this priority with the first one, one sees that whereas oil companies basically want to enlarge the market for their products, governments are quite happy with a shortage situation: pumping less oil raises its price, which provides more revenue per barrel sold while at the same time leaving more oil in the ground for the future. This is the second reason (after supply vs. demand) why the price will not come down. For the oil-importing states petroleum is not a luxury they can do without. It is essential to the functioning of their economy and to the war-making capability of their armed forces. There is no known substitute for oil and that can readily deliver the same combination of benefits. Substitute ways to store and provide energy will certainly be developed in the future under the pressure of necessity. But in the short-term there is no alternative to petroleum and its by-products so the user has to pay the going price - whatever it might be. This is basically what the OPEC spokespeople are saying: "The price will continue to rise, so get used to it". As the largest oil importer on the globe, the United States is particularly vulnerable to this development. We might be able, in the short term, to somewhat reduce our petroleum consumption and thus our oil import bill, which is all to the good. But this will not change the fundamental dynamics of the situation, nor will it lower the price. Whatever oil we do not consume will be snatched up by other countries - such as China, which is committed to a double-digit rate of growth, which translate into a corresponding rate of increase in oil consumption. The "energy crisis" is therefore here to stay. It is in fact not a crisis at all, if we understand "crisis" as a sudden and unpredictable, but nevertheless transitory, event. The current crunch is the result of steady and predictable trends which we have chosen to ignore at our peril. Such a situation will not be resolved by quick fixes and electoral promises, but by realistic policies implemented over both the short and the long term. There are solutions, and we will address them in the coming installments.
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