Oil has us under a barrel, and we're not getting up
It's not cyclical or speculation - it's the end of an era
MICHAEL WARREN
Globe and Mail: June 24, 2008
The Age of Abundance is over. It started its decline when crude oil careered through $80 a barrel last year. Most of us were too busy enjoying the late-summer weather to notice. Crude oil has more than doubled in price over the past 12 months, and every other form of energy is following suit.
The economies of the Western world have been built on the availability of relatively cheap energy. If oil and natural-gas prices remain where they are or higher, it will have a devastating impact on our consumer-driven standard of life.
But before we go there, let's consider the arguments advanced by the optimists.
An investment analyst I know often says, "The cure for high prices is high prices." He asserts that all commodities are cyclical, including oil. They all react the same way. When prices get too high, we find ways to use them more efficiently or we find substitutes.
Two years ago, when oil was trading at $60 a barrel, he and many others were convinced that the price wouldn't go any higher than $80. Today, with the price pushing $140, he argues that his thesis is still correct - it's just taking a little longer to materialize.
My analyst friend is not alone. Last week, the chief economist of National Bank Financial said oil should fall back to the $80 range over the next couple of years. He argues that the current price is being driven largely by speculators - the bubble is bound to burst.
I don't think so. There is growing evidence that oil is skyrocketing in direct response to the basic laws of supply and demand. China, Russia, India, Brazil and many other emerging economies are fuelling their own growth with oil, just as the West has for the past century. Jeff Rubin of CIBC World Markets maintains that this new demand is "more than making up for the price-induced drop in consumption in North America, Europe and Japan."
He also minimizes the role of speculation: "Even if speculators took physical delivery of all the future oil contracts they have bought over the last five years, it would only divert from the market about a fifth of the new oil demand from China during that period."
And world oil inventories have remained within their long-term average. So this seems to rule out hoarding as a reason for the unprecedented price rise.
Oil permeates our lives. It's in the roads we drive on and the roofs over our heads. We wrap our houses and our food in it. We walk on it, sit on it and wear it. When it's refined into gasoline, it is the most efficient and portable form of energy we have yet discovered.
The optimists are wrong. It is not like any other commodity. And the market is simply reflecting our gluttonous dependency.
Energy costs have risen so fast that we can only guess at what it will mean for our future way of life. But the early signs are everywhere.
There are daily news reports about escalating gasoline prices. A recent survey shows that 53 per cent of Canadians have already begun to change their transportation habits. Gasoline theft is becoming commonplace.
The era of cheap world air travel is likely over. The airline industry is in free-fall. Food prices are rising, largely due to transportation costs. Year-round fresh fruit is destined to be a luxury. Suburban homes that require long commutes and two cars are already losing value.
Marine shipping costs have reportedly jumped 72 per cent since last year. Our material standard of living depends on the affordable movement of goods.
Don't be surprised to see the price of imported clothes, electronics and many other staples start to climb. Some analysts are already forecasting the demise of discount chains, such as Wal-Mart, that source most of their merchandise from countries that are thousands of expensive kilometres from their major markets.
Everything to do with tourism will suffer. Instead of going on vacations, more of us will be taking "stay-cations," learning to enjoy what our own communities have to offer, whether we want to or not.
Inflation, which has been under control for nearly two decades, is showing signs of raising its ugly head again. Interest rates are bound to follow, and people on fixed incomes at or below the poverty line will be hit the hardest. They still have to eat, heat their homes and fuel their cars.
There may be a few upsides to this scenario, but not many. As the cost of imports rise, more of what we buy may be grown and manufactured closer to home. These goods will be more expensive, but they will help to create domestic jobs. More walking and cycling certainly won't hurt our health. And not having access to those tasteless, hard tomatoes every winter won't be much of a sacrifice.
If soaring costs slow consumption of carbon-based fuels, then maybe the environment will be an early beneficiary. We might even begin to see serious efforts in Canada to develop more dense, energy efficient cities that take greater advantage of existing infrastructure.
Overall, however, this not good news. Economic suffering on a large scale has already begun, and most governments, including our own, seem oblivious to the impact of runaway energy costs and the burden they will place on the most vulnerable in our society.
Before long, this will become the political issue that trumps all others.
Michael Warren is chairman of The Warren Group Inc. and a former Ontario deputy minister, chief general manager of the Toronto Transit Commission and CEO and president of Canada Post Corp.
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A good enough column - but I do wish that articles like this pointed out that world oil production has been flat since the middle of 2005, neither rising much, nor decreasing much, but essentially just bobbling along. Every few years, the Saudis announce major increases in the oil they will produce, and have not since 2004 met their stated targets. Yet the media report this with a kind of breathless "it will be the most they produced since 1981!". They also don't report that production does not equal exports, Saudia Arabia and the UAE have realized that they better build their own economies and that's requiring a LOT of oil (as is their increased population), so they are exporting less than they used to. I've been to Dubai, and you literally do not cross the street without a car - in the cooler time of the year!