It Takes A Bubble...
Instead of asking (almost begging) the OPEC to raise output, the US should really look at her fuel consumption behaviours. Make them more efficient! But as Matthew Lynn explains in his commentary on Bloomberg, they just don't have the guts to make people rethink their fuel consumption patterns. Extract below:
Prices of oil, commodities and food have exploded in recent months. Although there are some solid foundations to that, the boom has now turned into a bubble. Prices are starting to race far ahead of anything that can be justified by the fundamentals of supply and demand.
Oil now costs more than $130 a barrel. Nobody expects the price to come down fast anytime soon. Instead, it may go higher.
What is true of oil is true of many other basic commodities. At one point, rice was a record $25.07 for 100 pounds. That has sparked riots from Haiti to Egypt. Some people may go hungry.
Not surprisingly, that has triggered action against speculators.
Yet they are wrong in thinking it's a bad thing. Here's why.
First, oil production needs to expand. The International Energy Agency estimates global oil consumption will rise to 98.5 million barrels a day by 2015 from 84.6 million in 2006. By 2030, it will be up to 116.3 million. To get that out of the ground and into the pumps is going to involve more exploration, production, refining and distribution. There is only one way that scale of investment will be mobilized: by causing a price increase that starts a buying frenzy in oil assets.
Next, the developed world has to start making itself more fuel-efficient. If China and India begin using as much oil as Europe and the U.S., we won't just need more supply -- we'll need lower consumption in rich countries.
To make that happen, behavior must change. That means gas- guzzling sport-utility vehicles will have to be replaced with hybrids. High-speed trains should take over from planes as the standard way of covering distances of as much as 1,000 miles (1,609 kilometers). Our houses have to be redesigned to use less energy, and more of it should come from solar and wind power.
All of that is expensive and hard work. Politicians are too nervous to impose the taxes to bring that about. With oil at $50 or $100 a barrel it wouldn't happen.
Lastly, agricultural policies need to change. Again, if India and China are to become as wealthy as Europe and the U.S., the world will need a lot more food. That means modifying the way we run agriculture, which, in Europe at least, has been more about preserving farming jobs, and caring for the landscape, than maximizing output. Countries such as Germany with lots of fertile land and falling populations should be turning themselves into major food exporters. But, again, it's not going to happen unless a massive price increase forces it.
It always takes a big shock to the system to change behavior. That is just what the speculative bubble in commodity prices is delivering. It may not be pretty, or comfortable, but it is the market doing the job -- which is why we should celebrate the bubble, and not condemn it.
Prices of oil, commodities and food have exploded in recent months. Although there are some solid foundations to that, the boom has now turned into a bubble. Prices are starting to race far ahead of anything that can be justified by the fundamentals of supply and demand.
Oil now costs more than $130 a barrel. Nobody expects the price to come down fast anytime soon. Instead, it may go higher.
What is true of oil is true of many other basic commodities. At one point, rice was a record $25.07 for 100 pounds. That has sparked riots from Haiti to Egypt. Some people may go hungry.
Not surprisingly, that has triggered action against speculators.
Yet they are wrong in thinking it's a bad thing. Here's why.
First, oil production needs to expand. The International Energy Agency estimates global oil consumption will rise to 98.5 million barrels a day by 2015 from 84.6 million in 2006. By 2030, it will be up to 116.3 million. To get that out of the ground and into the pumps is going to involve more exploration, production, refining and distribution. There is only one way that scale of investment will be mobilized: by causing a price increase that starts a buying frenzy in oil assets.
Next, the developed world has to start making itself more fuel-efficient. If China and India begin using as much oil as Europe and the U.S., we won't just need more supply -- we'll need lower consumption in rich countries.
To make that happen, behavior must change. That means gas- guzzling sport-utility vehicles will have to be replaced with hybrids. High-speed trains should take over from planes as the standard way of covering distances of as much as 1,000 miles (1,609 kilometers). Our houses have to be redesigned to use less energy, and more of it should come from solar and wind power.
All of that is expensive and hard work. Politicians are too nervous to impose the taxes to bring that about. With oil at $50 or $100 a barrel it wouldn't happen.
Lastly, agricultural policies need to change. Again, if India and China are to become as wealthy as Europe and the U.S., the world will need a lot more food. That means modifying the way we run agriculture, which, in Europe at least, has been more about preserving farming jobs, and caring for the landscape, than maximizing output. Countries such as Germany with lots of fertile land and falling populations should be turning themselves into major food exporters. But, again, it's not going to happen unless a massive price increase forces it.
It always takes a big shock to the system to change behavior. That is just what the speculative bubble in commodity prices is delivering. It may not be pretty, or comfortable, but it is the market doing the job -- which is why we should celebrate the bubble, and not condemn it.
posted by Ming at 9:05 PM
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