Below is the content of the email:
Dear Freakonomist,
I'm Raiza, an ordinary person who wonders alot on what on earth is gona happen to the world when the oil price hits US$200/ barrel which in turn would give a spiralling effect to the worlds economy wreaking havoc the global financial market. Understanding that you believe there is an economic explanation to everything intrigues me and leads me to email you on the following issues. I humbly request for your opinions and explanations.
What has been bothering me lately is the fact that inflations are occuring in most countries, Brunei is of no exception. I strongly believe that one contributing factor to this is the disturbing rise in oil price.
There are several excuses to the rise in oil price:
1) The global demand for oil is rising.
2) The dollar continues to fall to record lows.
3) And, OPEC refuses to raise production levels, insisting US recession will lower.
Today's newspaper mentions despite the Jeddah Summit where policy makers gathered to have emergency energy talks and that Saudi agreed to increase production by 200,000 barrels to 9.7 million per day, the oil price continues to rise. The rise in oil price this time is blamed on possible terrorist activities in Nigeria. If this is true then yes this would choke oil supplies hence demands on oil can not be answered fully.
Unless... more explorations are done which will mean more huge investments are needed. The story on the energy crisis seems to go on and on and no apparent favorable explanation to resolve the said crisis.
My question now is what are all the possible 'solutions' that can help the world to return to its stable state in the short-term and medium-term? Going green is one but this surely will cost us time! I hope to hear from you soon.
This is my reply:
Thanks so much for reading my blog. If I know the answer to your question then, I wouldn’t be sitting here at home and writing this :).
Nevertheless, this is what I think:
1. I don’t think there is an ‘easy’ solution to the current global crisis because as you clearly point out, there are several reasons to the rise in the oil price. Addressing one or trying to do so without solving the others, does not guarantee that the issue will be resolved, as is the case to the Saudi’s agreement to increase oil production (i.e. oil price remains high).
2. The US needs to strengthen its dollars but that would mean at the expense of the US economy, which as we speak, is ailing. A stronger dollar may worsen their Balance of Payment, which would not help their economic health. But a continuous weak dollar will surely be followed by a continuous increase in the oil price.
3. And then there is a problem of increasing global demand. Now, the ‘economically’ right thing to do is for all governments in the developing countries (where oil demand is high and growing) to remove any oil subsidy. If the domestic oil prices in these countries reflect the international price, then demand for oil will surely go down. But this is (as you can imagine) not without a great cost.
4. Another factor that’s causing the increase in price, if I may add, is the work of the commodity index buyers and speculators. Now, this needs to be stopped.
Without doing all of the above then sadly, it may be true that the only solution to the energy crisis is an actual global recession.
2 comments:
I just can't help but would like to add some very quick comments though these comments are supplementary and may or may not answer the questions that have been posed (hehe kan menumpang my thoughts):
a. In respect of the increasing oil prices, there is also an issue of increasing concerns with oil security. Bear in mind that oil security does not only focus on demand and supply but also relates to the affordability in prices. Within SEA, we have the ASEAN Petroleum Security Agreement (APSA) in place that addresses regional oil security; APSA currently is under review and has already accounted for an approved CERM. However, in my recent paper, I've put an argument with regards to APSA's capability to curb short term regional supply disruption (two rationales being the voluntary aspect of ASPA and the economic costs and benefits of stockpiling etc).
On a global scale, we've got the IEA Emergency Facility that addresses the security concerns. As a measure to curb physical shortages and at the same time 'acts' as a mechanism to lower prices, IEA members can release additional supplies into the market (through their respective 90-days oil stockpiles) which I think may help Saudi's pledge to raise production should the need is there. This has actually happened in the past e.g. the Katrina incident and the Gulf crisis. Relying (and blaming) on OPEC alone (in particular Saudi) will not ease the present situation unless IEA countries are ready to make similar commitments. The signs for releasing stocks are evident and yet, I have not seen (or I may have overlooked) IEA CERM doing anything substantial.
b) The issue of getting to the $200/bbl mark is intriguing. The possibility is there following on the comments provided by a number of leading energy economists. Though at the same time, if we look into the commodity trading perspective, one may also argue for a bubble waiting to burst. This can be supported if we follow on the Elliot Wave principle. If I am not mistaken, by looking into the upward price trend, we are perhaps at a 4th to 5th wave cycle which would imply that there is likelihood for oil prices to spiral downwards within the near future.
c) In addition to removing oil subsidies, another issue is also in tackling the issue of energy efficiency. This is a strong concern given that within the developing economies including China and India, energy inefficiency is a common theme. Just observe the annual trends plus the geometric averages of the energy balances of developing economies. Brunei as well is no stranger to energy inefficiencies (which is why we have the Energy Week that somewhat addresses the issue as well). I find it difficult to slow down energy demand given a multitude of reasons hence one way to ensure a more justifiable consumption growth is to put in a greater emphasis on demand-side management.
d) Coupled with subsidy removal and my above point, raising interest rates can also be considered to slow down consumption though it comes with its own pros and cons that will end up still running in circles if clear-cut policy strategies are not in place.
Regards
"The answer, my friend, is blowing in the wind...":) As the late John Dylan - the singer not the poet - used to sing... hhmmn;)
Seriously, the unnecessary evil war in Iraq was the root cause of the current energy crisis and global economic turmoil.
Bush the Terrorist will be good riddance once his controversial presidency ends soon. But just too bad the Democratic US President-to-be Barack Obama has to pick up the dirty linen and clean up the bloody mess his mean Republican predecessor is leaving behind globally..
How I wish the then-Russian President (now Prime Minister) Vladimir Putin and Chinese Premier Hu Jin Tao could have both stood up to the wild, wild west trigger-happy cowboy gun-slinger Bush back there in the United Nations 5 years ago when the 'Coalition of the Willing' invaded Iraq for the obnoxiously obvious oily reason of Dick Cheney-led firm, Halliburton!
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