Towards the end of last year, as financial panic about the global credit
crunch reached its climax, I wrote that a taxpayer-backed “plan B” would
soon be needed to the save the world banking system. If financial markets
failed to clear up the sub-prime mortgage mess by the end of the first
quarter, the consequences would be so horrific that governments would have
no choice but to step in.
This government-backed plan B was implemented in late February and early March
with the rescue of Bear Stearns and the nationalisation of Northern Rock. As
a result, the credit crunch is no longer a big threat to the world financial
system, even though its painful impact on the British and European economies
has only just started.
As the banking crisis has eased, however, a far greater danger has emerged to
global prosperity: the price of oil. It looks increasingly as if this is
another challenge that cannot simply be left to market forces. So is it time
for a government-led plan B to curb the price of oil? I believe it is - and
there are growing indications that world political leaders are starting to
think along these lines.
The present oil boom looks reminiscent of the housing bubble, the dot-com
bubble, the Japanese share bubble and all the financial bubbles before that.
It started with a genuine and important structural shift in the world
economy - the growth of China and the decline in non-Opec oil production -
but financial markets have magnified this beyond all reasonable bounds.
But another more important aspect of the oil boom is now attracting political
attention: An oil price above $100 a barrel is an enormous danger to the
world economy. It threatens to reignite global inflation, wreck development
plans in China and other emerging countries and magnifies geopolitical risks
by redistributing some 7 per cent of global GDP, roughly $4 trillion per
annum, from the stable societies of America, Europe and developing Asia to
potentially hostile regimes. These regimes then leak this money to Wahhabi
fundamentalist madrassas, communist insurgencies in South America and mafia
activities from former Soviet states.
As politicians and voters start to grasp this, pressure is mounting for
something to be done. As a result, a series of energy-related summits has
recently been announced, starting with an emergency meeting of oil producers
and consumers in Saudi Arabia and culminating in the G8 leaders' summit in
Japan in July. What, then, might a Plan B to reduce oil prices consist of?
And could it possibly work?
The second question can be answered by a leap of imagination: suppose first
that China and other developing countries, which now account for all of the
growth in global oil demand, stopped insulating domestic consumers and
industries from high global oil prices. They could do this, without
immediate hardship or political unrest, by abolishing all their energy
subsidies. To soften the blow to consumers, they could raise domestic prices
over a period of three to five years. Once prices reached global levels,
they could gradually introduce European-style energy or carbon taxes to
limit oil dependence, control pollution and encourage industries to adopt
energy-efficient technologies, perhaps even leapfrogging Europe and the US.
This may seem wishful thinking, but in the past few weeks, Indonesia,
Malaysia, Taiwan and India, have announced measures along these lines. The
world is now waiting for China to recognise that it too has an overwhelming
self-interest in becoming energy efficient - and that raising domestic
energy prices is the best way to achieve this.
Secondly, suppose that the EU agreed to a minimum level of petrol and diesel
taxes across Europe, set by each country within 10 or 15 per cent of the
highest level at present prevailing in the EU (which, depending on exchange
rates, is in Germany or Britain). By reducing tax competition, such a policy
would remove a main gripe of lorry drivers and transport companies in
countries with high energy taxes. This minimum energy tax could be raised by
3 per cent above the rate of inflation each year.
Thirdly, suppose that the US, Britain, Norway and other non-Opec oil producers
reduced - or abolished - oil production taxes and royalties on any extra new
oil produced in their territories. This would create powerful incentives for
oil companies to extract every possible barrel from existing oilfields.
Fourthly, suppose that either of the main US presidential candidates announced
firm targets for achieving energy independence - for example, that US oil
imports, already roughly static, would be reduced by 5 per cent every year.
This target could be met by setting energy or carbon taxes - refundable to
consumers through income tax cuts - at whatever level was required.
Fifthly, suppose that revenues from steadily rising petrol and diesel taxes in
Europe and America were earmarked wholly or substantially to subsidise
non-oil or zero-carbon energy sources.
Finally, suppose that financial regulators in America and Britain curbed
commodity speculation and discouraged long-term investment in oil by
financial institutions. The most important of these changes, proposed in the
recent Senate hearings, would close the loophole that allows investment
banks, such as Goldman Sachs, to enjoy the same privileges as oil producers
in commodity markets.
Regulators and politicians are starting to recognise that investment by
pension funds in commodities is detrimental to the interests of the world
economy because commodities are not productive assets in the same way as
company shares and that investors who buy commodities serve no social
purpose, as they do when they buy government bonds.
Would such a six-point plan have any effect on global oil prices? “Market
fundamentalists” - who believe that today's stratospheric prices reflect an
imbalance between supply and demand - would presumably claim that announcing
higher taxes on oil in the future would reduce the price only once these
taxes were imposed.
My guess, however, is that the sort of Augustinian programme suggested above -
raising prices to consumers but not just yet - would have an immediate and
powerful effect on prices, especially if the tax measures were matched by
restrictions on speculation and financial investment.
This could, of course, be wrong. But there is only one way to find out.
The oil-consuming nations have to agree on a plan B to cut oil prices, just as
they agreed on a plan B to ease the credit crunch. And they have to do this
within a matter of months. With the outlook for the global economy
deteriorating almost daily, the time to let market forces solve the energy
crisis is running out.
The heading should read "Oil is too important to burn"
Cantarell & North Sea declining ~8% a year.
Russia has just passed its peak.
Saudi Arabia can only increase production of heavy sour crude, light sweet crude peaked a few years ago.
1970 ~ 2 billion people
2008 ~ 6.7 billion people
Steve, UK,
I think your logic is flawed. These markets have been under federal control through regulations in several countries for over a century and we continue be faced with even greater implications. What your talking about is purely socialism, and any analysis of the system would prove its impossibility
Concerned Joe, Littleville, USA
I would also like to point out that speculation is an essential part of a functioning economy. This speculation will have a greater effect at change than any crooked politician or authoritarian state. History has proved that state control, and state power always equate to oppression and inequality
Concerned Joe, Littleville, USA
I would suggest that the author quit reading Marx, Engles, and Lenin and begin reading Mises.
Concerned Joe, Littleville, USA
Please please. The speculators have been shorting oil of late. (ie. driving oil prices down, not up!). The high oil price is most definitely NOT caused by speculators. It is caused by the fact that every year for at least the last 20 years, more oil has been used than has been found. It's simple.
Arne Wold, Oslo, Norway
speculators' role in the marketplace is to assume the inherit RISKS involved in any free, capitalist, endeavor.
Those risks are always present. If not for the speculators the oil companies would be at GREATER RISKS and potentially passing on even higher costs to the consumers.
Dan Walter, Canton, USA
With all due respect I would add that market is too important to leave to markets. The sixth point suffices to start solving the problem: curb commodities speculation, not only in oil but also in food futures. Of course, don't forget to call back the sovereign Nation State to tidy up the mess.
Geraldo Lino, Rio de Janeiro, Brazil
The answer is supply, supply, supply. Which for the slow learners means drill, drill, drill. Also more nukes and more coal. I fight idiocy wherever I find it.
Diverting money from conventional energy and sending it to green energy is a waste. We saw what worked and what failed 30 years ago.
Alan S., Palmerton,Pa, USA
Yes the bullish speculators are buying futures, but for every buyer of a future there's a seller. So it's fundamentals driving oil, and governments are left looking for scapegoats. Thus you get Soros blaming speculators, but he's probably just trying to talk the market down because he's short.
Andrew, Auckland, New Zealand
Why shouldn't the oil problems be left to the market? The current problems are purely the result of pandering politicians, environmental Luddites, and opportunistic speculators. Get them out of the way and watch the cost of oil tumble back to where it was 15 years ago.
Chad, Santa Barbara, USA
Build nuclear power stations -- no greenhouse gases and less need for oil. The French did this after the last oil shock.
Mark, Melbourne, Australia
Agree with comments by Ricardo above - commodity trading in oil should be restricted to those taking physical delivery in the oil supply chain only. Otherwise it is self fulfilling prophesy for speculators betting on an escalator of oil prices over short to medium term.
TP, Egham, UK
We are on the downward slope of oil production (not temporary). Because various VI's including governments wont admit to this for financial and political reasons, scapegoats will abound and every pundit in the media will have a simplistic but incorrect answer.
Steve, London, UK
If you curb 'speculation' in consuming countries, 'speculation' will move t bid up prices on producing nations exchanges like Russia and Iran. This would remove any incentive to keep prices down and result in much higher prices. Actually there would be much, much higher prices and shortages.
Jon, Bolton, United Kingdom
The last time I looked at the "position reports" for holders of oil contracts the speculators were in a net short positions. So those who claim they are responsible for the run-up in the price clearly have some explaining to do.
J Lee, Houston, Texas
My only real exception with this article is semantics. The price of oil about $100 a barrel is not causing all of the horrible things mentioned in here. The cost of energy (largely generated with oil) is causing trouble. This change also encourages to think of solutions well beyond oil.
tim, providence,
How odd - you say oil prices should not be left to the market, but your most important recommendations are mostly to do with allowing or encouraging market forces to work better - remove subsidies, harmonise or reduce taxes.
Lucy, London,
How long are smaller countries going to allow speculation by those with billions destroy the whole fabric of their societies? Oil at $250 a barrell? China will be taking over Africa, US and UK will colonise Iraq. Revolutions start when a few makes the lives of the many poorer.
Matthew Bramall, Wadhurst, East Sussex
Why on earth would oil producing countries dispense with royalties on new finds? How much do you think it costs to supply the infrastructure and skilled personnel to support these expansions of supply ?
There is no reason on earth why oil producers should subsidize the gas guzzlers of the world
martin, Toronto, Canada
Surely the lack of investment in oil for the last 15 years is the reason we have short supply. Investment in oil is an inflation hedge for peoples pensions. Inflation is back, we need to get used to it, and part of that is getting rid of price controls and subsidies which are only counter productive
Brett, London, UK
The last point on speculation: maybe it is the wrong way round.
Consumers are disappointed by higher prices because they are unprotected. They couldn't lock-in forward prices when they were lower.
Speculation in oil is much lower that other financial mkts. Broader participation is better.
Chris, London, UK
The USA is the pinnacle of fuel inefficiency and waste of all resources in general. With uncontrolled urban sprawl, pitiful mass transit, etc. we Americans whine that somehow we cannot make it with $4 a gallon fuel, yet Europe despite its handwringing is no worse off than we at $10 a gallon. Pity!
Jon Maynard, Lansing MI, USA
Either you're a capitalist or your're not.
David, Bromley,
The impact of excess petro-dollars being funneled back into hedge funds who in-turn bet on higher oil futures, is similar to the dot-com boom; analysts touting worthless companies and companies rewarding the analysts, a self-enforcing closed loop.
A classical Pyramid Scheme ?
NMB, California, USA
There is more than enough sunlight to answer the world's energy needs, and the technology is there to exploit it. The electric car is already a viable form of transport and can be developed much further.
It is vested interests that are deliberately blocking such developments.
Chris, Sheffield,
I drive a little three cylinder car and use it to commute to and from work each day. With fuel at its current price it costs me around $34.00 to fill an empty tank while others around me are paying $90.00 to fill theirs (to cover the same distance). The performance of my vehicle is sufficient.
Herbert Dower, Shailer Park, Australia
Some of these ideas are ok, but the others are simply way off of rational economic thinking - in other words written by someone who clearly doesn't understand the oil market itself nor the economic political reality. If oil is high just bcause of speculation why are oil inventories wordwide growing?
Etienne, NY, USA
Either way, it seems it's the taxpayers who will get "it" in the end ... so to speak.
Additionally, should US taxpayers continue to subsidize the rest of the world market by providing the backbone force protection for the major sea lanes internationally?
Gene Brown, Henniker, NH, USA
Suppose we suddently had the wisdom to recognize that if we don't restrain our consumption (which might lessen economic activity in some sectors but this can be increased in others via tax channels) we will disappear and much sooner than we think - either trough environmental disaster or war!!
Esther Phillips, Leatherhead,
I agree. No-one can see an invisible hand adjusting this market for better effifiency and that's probably because the invisible hand is not there. I have only to deplore that your suggestions applicable to the EU are inflation generating and based on taxes.There has to be a better way than more tax.
Rui, Lisbon, Portugal
Reduce tax? Under a Labour government? No chance!
Ian Tinn, Slough, England
The British government deliberately raises the petrol price to about double what it could be. There may be arguments on sustainability, but I do not see the logic in keeping our transport costs so much higher than the USA. We have been self sufficient in oil for 25 years. We should decide!
Brian Lewis, Manila, Philippines
Malcom is right, but short of the truth.
The hard fact is that the financial economy has grown so much faster than real economy in the last 30 years that there are more speculators' money than commodities and assets to speculate on.
Especially so now real estate is no longer a solid investment
Rui, Lisbon, Portugal
Towards the end of last year you wrote a lot of things with a comical lack of consistency, so don't play the soothsayer so glibly.
Neil McF, Southampton, England
Strange that, when oil prices were low, the market was working fine, but now that they are above $100/bl, the situation "cannot be left to market forces."
You can't ban speculators. By investing in oil futures, Wall St is providing funds for producers to raise output.
Jim, Epsom, UK
Encourage supply by removing all taxes.
Discourage demand by adding tax to the market price.
Easy enough to say...
Richard Boyce, Haywards Heath, West Sussex
AK - Next you'll be saying that it should be illegal to hedge against monetary inflation. Sounds like FDR speak and oil is the new gold. Why do you avoid writing about the last few years of G8 currency debasement and the effect this has had on the price of everything?
James, Vancouver,
Surely it should be possible for nations to agree that certain essentials products, say oil, maize and rice should not be traded for speculative reasons. The present oil price increase is not caused by a shortage but by gambling on future prices.
Chris, Camberley, UK
Forget six point plans - you only need one; that being a rule that anyone who buy's commodities MUST take possesion of them. That way - if the pipeline's really are full, the price will fall. The problem at the moment is the position's taken don't hold enough risk. Make it a true market.
Ricardo, Cambridge,
Suppose, and here's a radical idea, we stopped imposing on the world permanently negative real interest rates. You could start in Washington, then Tokyo, then Beijing. The consensus that the world must grow at 5% pa is flat wrong. Get ready for high real rates - the genie is out.
Mark, Edinburgh, UK
It's fascinating to see how the establishment and its hangers-on change their tune according to where their interests lie. Not long ago free markets and open competition were panaceas; global, perpetual virtues. Now, suddenly, the price of oil is "too important to be left to the market".
Tom Welsh, Basingstoke,
Sound reasoning, Anatole.
However, every government has a different point of view, and most of these are self-serving & short termist in nature.
Little progress will be made until a global body with enforceable regulatory powers is created.
Regards,
M.
Mark, Woking, UK
As far as increasing US production, the prevailing politics is to prevent this. A reading point by democrat politicians is that we will "not drill our way out of this problem". Politicians seem more confortable posing as being tough on the oil companies. We are in election time.
Doug Harris, Dallas, Texas
The question is: should I borrow money to put a windmill and solar panels on the roof? If the answer is no, then the oil boom still as some way to go.
Adrian Gilbert, Tonbridge,
The only reason money is piling into Oil is because currently is has nowhere else to go. The Equity, Bond and Asset Backed markets are all moribund due to the credit crunch.
As soon as these markets return to normailty Oil will drop down to last August levels.
Malcolm, London,
I am so shocked at the amount of jealous little people there are in the world who clearly never worked hard enough to afford a nice car. Get real recent estimates are of well over 1000years of oil production left this is purely the work of greedy arabs!
george, yarm, england
Are these 'potentially hostile states' the same ones we 'share values with'?
Your solution to bubbles economics is to get rid of price controls in developing countries. That will only allow more bubble opportunities for speculators.
Markets are the problem, not the solution.
Mike Murray, Bath,
To cure a problem you need to understand its cause. The oil price inflation is a direct result of the Fed slashing US interest rates to 2%. If these were put up to 5% oil would return to sub $100 prices.
Simon, London,
There is one prime reason why oil prices are soaring and the answer is in the word 'soaring' . It is caused by financial speculation. The banks are engged in 'face to face' unregulated trading. This alows them to build up enormous positions without haveing to show the funds to complete.
David Nammory, Liverpool,
Economists believe that fiddling with numbers can solve everything. We inhabit an oil-built world that has a very faulty foundation.
Increased oil prices will kill economies. The 6.7 billion people living off oil will reduce to a new sustainable level. It will be very very nasty unfortunately.
C Smith, Norwich, UK
Mr Kaletsky - wake up and smell the offiee. The oil price is no bubble its made up of simple supply/demand but mostly by inflation and the central bankers may talk tough on inflation but they will continue to debase our currencies. Mark my words we will see $300 oil in the next 5 years.
Steve , Edgware, UK
High oil prices (along with high energy, food and everything else) is not such a bad thing. I think for many people, this is the first time in their lives that they have given thought to their consumption behaviour and realise they need to cut back, which is obviously beneficial to the environment.
smith, cardiff, uk
It seems to me that the replacement of income tax by a carbon tax on finite fossil energy resources will both remove a disincentive to work, while ecouraging the development of alternative renewable energy sources and the more prudent use of those whose supply is not limitless
Arnold Ward, Weybridge, Surrey, UK
One massive benefit of the high price - it's weaning us off it the stuff as petrol sales are currently down a huge 20% down. If repeated globally, surely great news for the environment.?
cww, Suffolk,
The OPEC cartel is telling us the piplines are full, no need for more oil.
The Hedge-funders claim there is a supply shortage, hence higher prices.
Which do you believe?
Me, I think they are both one and the same, massive petro-dollars are invested back into hedge funds which bet for higher oil !
NMB, California, USA
We have to face the fact that we are living at the end of the Age of Hydrocarbons. Best learn how to conserve the oil we have left while we transition to a low-energy future. Hopefully we'll adapt in time. It'll be painful, but it's not like we have an alternative.
Mick, Sydney, Australia
Remember the Hunt brothers' activities in silver, starting in 1979 and through the early 80s?
What gambling activity, save commodity speculation, would be tolerated if the actual outcome - say, the result of a horserace - could be manipulated by weight of money to gain potentially unlimited profit?
Padraig, Perth, Australia
Is'nt strange. When things are going well and all the companies are making big profits, its good old free enterprise.
The market will fix all.
When things start going bad, the government should do something.
frank, Sydney, Australia
Get real - oil is a finite resource. If selling oil is my only source of income why would I agree to a price reduction. I would ensure the price stayed high until the well ran dry - which the well surely will. There is no oil cyle as there is a water cycle.
John Rutledge, Hastings, New Zealand
I'm actually enjoying the noticable decline in the number of larger vehicles on the roads. I've always driven a small car and now I get to see the traffic ahead of me most of the time...and fewer headlights shining in my rearview ! Less consumption and fresher air.....just what the doctor ordered!
CJ, Vancouver, Canada
Politicians can only block or unblock. They never create anything. Politicians caused the world's energy prices and cannot be the solution to them. I confidently predict that future generations will look back and marvel how private enterprise will have solved what will be viewed as a minor problem.
Tom, Perth, Oz
All the Central Banks have to do is to raise interest rates and Governments to provide concessionary tax rates on bond and deposit interest payments while selling a trillion or two of irredeemable bonds. Financing commodities is economically more productive support to oil E&P than loans on housing.
Damian, Brighton, UK
one of the worst articles i've seen from k....
what do you suppose the 'speculators' are doing with the oil?
holding it off the market by keeping it in their bath?
regards
abelard, oxford,
Forgive my cynicism - but isn't a combination of weak dollar and high oil prices a very good way from the US to prevent rapid Chinese and Indian economic growth and everybody blames the Chinese anyway?
Bob, Sevenoaks, UK
Interesting. But wishful thinking. Can't prevent individuals from freely inveting their funds/savings in commodities.
Raul, yarm, uk
We are wasting the oil on running housewives to supermarkets and children to school.
Unfortunately governments don't have the political will to stop this. However market forces will prove effective.
Malcolm McLean, Bradford, UK
Points one to five are healthy, progressive ideas, but only six will have an immediate impact.
The gamblers are putting their (possibly sub-prime) houses on a dead cert with no limit. They need to be reined in.
Otherwise there is nothing to stop oil prices hitting $150, then $175, then $200.
Tim Probert, Tunbridge Wells, UK
Oh dear, the author is in cloud cuckoo land. The credit crunch has only just begun. There is at least $2-3 trillion to come. Unlike the Fed & ECB, the BoE & UK govt have no idea of how to supply liquidity in a crisis and will trigger a global depression. The rest of the article is irrelevant.
R Carolus, Kano,
Suddenly the first world knows what its like to be blackmailed by speculators not too different than George Soros's manipulation of small currencies. Now all hell breaks loose. Speculators who manipulate are no different than extortionists like Al Capone.
George Townsend, Elk Grove, CA USA
Mr Kaletsky - excellent article. I would add one more item on the plan, and that is to send an immediate signal to the speculators that one way or another their unwarranted speculation on driving prices up will be curbed and the bubble will be pricked - the words themselves should start a tailspin
Max, Manchester, UK
On the question of regulating trading in energy commodities, there must be a recognition that energy is fundamental to the economy and security. Only those who have the intention and ability to really take delivery of energy products should be allowed to buy them. Get rid of the speculators.
Tony, Chicago, USA