[R-G] [BillTottenWeblog] The Peak Oil Crisis: Speculation, Subsidies & Megacities

[Bill Totten]

by Tom Whipple

Falls Church News-Press (May 29 2008)


The energy issue of the week is whether high gasoline prices are being
caused by supply no longer being able to keep with demand or by
speculators garnering untoward riches at the expense of hardworking
motorists.

The facts, economic theory, and the most knowledgeable observers such as
the US Secretary of Energy are telling us that the problem is one of
supply and demand. Speculators, however, make an irresistible scapegoat
that few politicians can ignore. They are nameless, faceless (probably
foreign) individuals that can be bashed with impunity without the
slightest hint of political incorrectness.

Blaming speculators is now worldwide. OPEC officials routinely mention
the role played by speculators as the chief cause of high oil prices.
German leaders have proposed a worldwide ban on oil trading by
speculators. The transport chief for Germany's Social Democrats said his
party will call on the G8 powers to prohibit leveraged trading on energy
contracts, claiming that 25 percent of the current crude price is caused
by speculators.

The Germans, however, can't compare to the US oil executive who told
Congress last week that the real price of oil might be as low as $30 a
barrel without the speculators. If he is right, gasoline could fall back
to eighty cents a gallon, SUV sales would flourish, and all would be
well. Placing limits on speculators, probably by mandating that leverage
on futures contracts be reduced or eliminated, seems like a good idea to
many in Congress. Since Congress cannot realistically expect to summon
up more oil production in the short run, nor order the Chinese to stop
growing their economy, cracking down on speculators seems like a sure
vote-getter in this fall's elections. Sensible or not, restrictions on
speculating combined with drilling in Alaska looks like a good bet.

Of more importance, however, are the reductions in government mandated
price caps that have happened or are under consideration around the
world. To appreciate how serious this issue may become, it is necessary
to remember that since the beginning of the oil age a hundred years or
so ago, the world's population has increased from about 1.5 billion to
6.7 billion. The CIA estimates that about forty percent of the earth's
population is busy growing food which leaves about four billion of us
who aren't. Now a lot of the four billion, who depend on somebody else
growing food for them, live in reasonably advanced countries that can
probably figure out how to keep its people fed without lots of cheap
oil. Unfortunately a lot don't and that is where the problem begins.

As the world's population grew, more and more people found themselves
gravitating to cities which grew to megacities (population of more than
ten million) and many will soon reach hypercity (population over twenty
million) status. Unfortunately, most of our mega- and hypercities are
not in the more well-off countries. Jakarta, Dhaka, Karachi, Bombay and
Lagos are all in contention to become hypercities shortly.

Once you move or are born into one of these places, you are no longer in
a position to raise much of your own food or gather your own cooking
fuel. Whether you realize it or not, you have become dependent on cheap
oil to raise and bring to you much of the food you eat, and
petroleum-derived fuel, usually kerosene or propane, to cook it. Many in
the underdeveloped world's megacities live right on the edge. For them,
food and fuel prices are a life and death issue.

Governments have long been aware of the affordability problem and have
mandated various forms of subsidies or price caps for fuel. This
practice is especially prevalent in Asia and oil in exporting countries
which consider low fuel prices as a birthright. Venezuela is still the
champion with gasoline retailing at around twelve cents a gallon.

In many cases, national oil companies were simply given a set retail
price and were told to swallow any losses. Given that many of the most
populous countries such as China, India, Indonesia, Pakistan and
Bangladesh all had subsidies, many of he world's consumers have been
shielded from the six fold increases in petroleum prices in the last
five years. Cheap retail fuel prices did nothing to dampen demand and
only contributed to the run-up in world prices. In the last few months,
however, prices have increased so rapidly that national oil companies
and even several large national governments could no longer afford to
maintain the subsidies.

Last week the subsidizers began to fold. Indonesia increased fuel prices
by 29 percent, Sri Lanka did the same and India and Bangladesh are
expected to do the same shortly. Only the Chinese, who have world class
inflation underway and $1.2 trillion in liquid reserves, are saying they
will continue to subsidize fuel costs.

While there seems no choice but to raise prices, the consequences are
not predictable nor likely to be pleasant. Already enduring rapidly
increasing food costs, it is feared that increasing the cost of
transportation and cooking will result in government-toppling social unrest.

The fuel subsidy situation obviously is not going to get any better. Oil
prices will continue to rise. In the advanced countries the solution to
increasing oil prices will be to park the cars and planes and start
riding on buses and trains, while continuing to outbid the poor
countries for the remaining supplies of oil. Those living in the world's
new mega- and hypercities are going to have a far tougher time. Oil has
built these monstrosities where hundreds of millions will be trapped
without direct access to food supplies and cooking fuel. Someday, the
historians will note that the collapse of many megacities was among the
first real tragedies of peak oil.

Copyright (c) 2008 Falls Church News-Press

http://www.fcnp.com/national_commentary/the_peak_oil_crisis_speculation_subsidies__megacities_20080529.html


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