Wednesday, March 26, 2003

The Price of Oil and the National Interest

The Money Programme had an interesting episode concerning "energy security". Basically its argument looked not at whether oil was a factor, but at whether oil is running out. One theme was that Britain may start being an importer of oil as soon as 2015 and so the Britain in fact needs cheap oil.

Here are two reasons why this is not so:

1) If Britain can expect to stop exporting the stuff in the next two decades then it will need to get as much money as possible. That means higher oil prices. Coupled to this is the fact that Britain is a fairly high cost producer - due to the fact that the rigs are at sea and it pays first world waged - then the case for medium term high prices becomes overwhelming. Sure petrol taxes would have to be cut, but at 75% of the cost of a gallon of petrol there's plenty of room.

2) When we get to importing status the last thing we need is an artificial demand from the rest of the world. Governmental efforts to buck the market in the end fail, and if an artificial lowering of the price by ever more intrusive interventions in the middle east runs out just as we are running out of oil there will be a double whammy. We need to encourage people to develop alternatives to oil, energy efficiency, more effective extraction and new fields. You can do this ineffectively by subsidy or you can let the market take care of it by ... raising the price. In the medium term we won't feel it (we'll be exporting the stuff) but in the long run the benefits of lower use and greater production will be coming on stream.

A low oil price may be in America's interest (although if I were American I would argue that the market rather than the armed forces are better at looking after the adjustment) but it is certainly not in ours. I doubt the war is all about oil, however it would be naive to say that oil is not an important factor in this war. It's just that we could do with a higher oil price right now.


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