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Politics at the pump

Peter Leslie

“Sixty dollars for a tank of gas! Three bucks for a gallon – why doesn’t President Bush do something?”

Don’t blame Hurricane Katrina or the President or the oil companies. The price of oil is set by global demand and supply. World-wide demand is increasing and supply is not keeping up. Why?

Blame the political changes in India and China, both of which are now favoring a more capitalist/entrepreneurial approach to world markets. With a combined population of 2.4 billion, these two countries now account for a greater share (23 percent) of world gross domestic product than the whole of Europe. Both economies suffered for years from poor growth as a result of misguided policies (socialism and communism) that prevented them from making full use of their talents. Growth rates are now very fast and putting a strain on the world economy.

The millions of bicycles that clogged Beijing’s avenues have given way to millions of cars. The rickshaw pullers of New Delhi are disappearing. Both countries are developing a sizeable, well-educated and entrepreneurial middle class that is eager to equal Western standards of living.

What does this mean for the price of oil in the future? Take China’s 1.3 billion population. Their per capita use of energy is at present less than one-seventh of that of the United States. India’s 1.1 billion people use less than one-fifteenth of the energy per person when compared to the U.S. Assuming that over time each country’s energy consumption per person only reaches one-quarter of that of this country, we have a potentially huge explosion in demand.

U.S. domestic oil production peaked years ago and we have consistently increased our reliance on imported oil. That was one thing in the years that India and China’s economies languished and Saudi Arabia had plenty of spare oil production capacity.

But now oil production is not keeping up with demand. Many oil fields are well past their peak production capacity and new production is far more expensive than old. True, there are billions of barrels of oil in shale oil deposits and in the Athabascar Tar Sands, but expect a hefty price for oil from these sources, and this will certainly result in gas at much more than $3 per gallon.

In 2004, we imported $197 billion of goods from China and currently we are importing at a rate of around $240 billion per year. All these imports mean jobs for the Chinese, which then results in increased demand for world oil. There are similar demand pressures from India, which is benefiting from all the work outsourced from U.S. companies.

As world demand goes up and production fails to keep pace, we can expect oil prices to rise to a level where demand and supply come into balance. Economists are therefore predicting “demand degradation,” that is, people reacting to the price of gas by driving less or by driving more fuel-efficient cars. And this winter there will be a large number of households reacting to the price of natural gas by turning down the thermostats and wearing warmer clothes.

You can now buy a combined DVD player/VCR for under $90, under a quarter of the price of a few years ago, thanks to the Chinese. But remember that each import is adding to the trade deficit and may be giving employment to someone who will soon be buying his or her first car and adding to world oil demand. So next time you complain about the high price of gas or your winter heating bill, think about all you have saved each time you bought a cheap imported product.

What is the answer? First, we need to plan for a transition to a less oil-reliant economy and this we can do by increasing average vehicle fuel efficiency, something that U.S. manufacturers have resisted for years. We can insulate our houses better and be less profligate with air conditioning in summer and heating in winter. Secondly, we can pressure the Chinese to put brakes on their ever increasing exports to the United States. We can insist on a more realistic exchange rate that does not artificially lower prices of Chinese goods to U.S. customers.

Even if we do all this, “demand degradation” is going to be the norm and some of our fellow citizens will find themselves priced out of the market, forced to turn to public transportation and to colder houses. Too bad our federal government’s policies, with regard to exempting SUVs from average fuel efficiency (CAFE) standards, have contributed to this situation.

Now is the time to plan for your next car to be a hybrid or a much more fuel- efficient model than the one you have now. And make sure that heat is not escaping from your house this winter. VT

Peter Leslie is the former CFO of the United Nations Development programme.


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