Paseo de Coro
How to cope with the rising price of oil
By Fernando Fajardo
Cebu Daily News
First Posted 11:56:00 07/04/2008
As I said before here, demand for oil surged from 30 million barrels a day to 50 million barrels a day from the mid ’60s to early ’70s. Part of it was caused by the increase in income of the people in the growing economies which allowed them to acquire cars and many other power using gadgets. The other reason is the very low price of oil in the mid ’60s which in today’s price is worth US$20 only a barrel. Feeling cheated by the very low price of their main product and export, the Arabs struck back with an oil embargo in 1973, using the Organization of Petroleum Exporting Countries (OPEC) as vehicle which they controlled. Eventually, this caused the price of oil to reach $50 per barrel in 1978 at current price.
Events like the 1979 revolution in Iran and the Iran-Iraq war that followed pushed the price of oil much higher, reaching the $100 mark in 1980 at current price. The world felt that was too much and responded accordingly to reduce their demand for oil. Many shifted to the use of smaller cars, for example. Spurred by the high price of oil, the rest of the world also increased their efforts to find new sources of oil. As a result, large oil reserves in the Gulf of Mexico and the North Sea were discovered and subsequently developed. Russia opened up too and helped ease the tight oil market engineered by OPEC. All these led to the collapse in the price of oil which remained low at the pre-1973 level for some time except during Saddam’s invasion of Kuwait.
Compared to the more than 20 barrels of oil a day increase in demand from 1964 to 1973, a short period of 9 years, the demand for oil increased only by less than 20 barrels a day from 1973 to 1998, a much longer period of 25 years. Last year, demand for oil reached 85 million barrels. This is only 12 million barrels a day more than in 1998 or 9 years earlier but it was enough to tighten the oil market and spark the surge in the price of oil which continues up to now. The boom in China is seen as one of the causes. India is another. The real reason, however, is that nothing much had been happening in the supply side to match the increasing demand for oil.
Now the price of oil already breached the $140 mark a barrel. Based on past trends it will not be long when it will breach $150 a barrel. What is our response to this?
We import almost all our oil needs but as a small economy, no matter what we do with our demand it will not alter the world market price for oil. Much of the day-to-day movement of the price of oil is also caused by the disruption in short-term supply as when there is trouble in Nigeria, for example, an oil producer. Considering oil supply however, which is not easy to find these days, and demand which is unrelentingly moving up because of population pressure and the increasing industrialization of China and other formerly underdeveloped economies, the long-term trend in the price of oil is unquestionably upward. No less than a drastic cut in demand or change in our lifestyle worldwide, therefore, is needed if we want to bring back the price of oil below $100.
While we are only a small player in the world market for oil, this does not mean also that it will be useless for us to do something to reduce our demand for oil. Firstly, when done together with the other small countries in the world we can still help bring down the world demand for oil, and consequently, its price. Secondly, cutting our demand for oil will also help discipline our local suppliers of oil. When they find that they are not selling enough oil as before, they will surely cut their price also to encourage more demand and increase their revenue.
The problem with the present is that despite the weekly increase in the price of oil we still do not feel the urgency to cut our oil use. We still see the same volume of traffic in our congested streets in the city and in the province I can still see many people from the city going there in their SUVs. This is the result of the highly inequitable distribution of income in the country. Our local rich are really rich and would not be troubled by the mere doubling or tripling of the price of oil. In the US where the middle class who drive cars is much larger, there is now a reported significant reduction in the use of their cars. In fact, to power their cars, many of them now turn to using used cooking oil which is plentiful in the country that popularized the fast-food industry.
In Cebu, our city officials now talk again about the Bus Rapid System or whatever would encourage more people to use public vehicles rather than private cars. Knowing the number of times they talk about this in the past however, I doubt if this will materialize soon. Much had been said about cutting the tax on oil imports and their use to reduce the price of oil. This is not the answer. Part of the answer may even include increasing the tax further if that is the only way to discipline our car owners or make them pay for their right to cause pollution and congestion in our streets.
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