Oil Shortages Begin to Pinch Growing Economies

By David L. Brown

There are more signs of trouble on the petroleum front. The recent OPEC meeting resulted in what could best be described as a cloud of misinformation, and meanwhile high oil prices resulting from shortages are creating economic problems worldwide.

A good example is China, where a fuel crisis is reported in the current issue of The Economist:

EFFORTS to cushion China’s citizens from rising oil prices are in disarray. Low government-controlled prices have led to a fuel-supply crisis in many parts of the country. Rationing, long queues, bad tempers and violence have become commonplace at filling stations. Fears of higher inflation are preventing a cure.

Things were supposed to improve after November 1st, when, for the first time in 17 months, the government allowed an increase (of around 10%) in the retail prices of petrol, diesel and kerosene. This was aimed at encouraging state-owned oil firms, whose profits have been threatened by the gap between high crude prices and prices at the pump, to refine more oil and boost supply to consumers. But it has not been enough. This week widespread shortages, which plagued the country two years ago and again in October, have re-emerged (if they ever truly abated).

As the Chinese are learning, governments can set prices but they cannot control the supply side. China has long subsidized petroleum products as a means of hyping its economy, but with world oil prices near $100 per barrel it can no longer afford that luxury.

As I pointed out in the recent essay “Dismal Age Looms as Oil Peak Passes” (posted November 6), economists generally assume that higher prices of any commodity or product will result in increased supplies, thus damping down prices. Unfortunately, there is no easy answer when those who supply the commodity are pumping out as much as they can.

Wildcatters used the term “dry hole” to describe an oil well that, when drilled, failed to produce any oil. World oil production is now entering the other end of that scenario, with formerly producing wells drying up. The effects will not get better, and as reported recently it is now believed by authoritative sources that the oil peak has passed.

I can remember as a young man driving to a nearby city 40 miles away to buy gasoline for ten cents a gallon because a “price war” was being waged by competing service stations. That was in the early 1960s, and even then a dime didn’t make much of a dent in one’s budget.

Cheap oil can never again be counted upon to drive economic growth. Both China and India have embarked on extensive development based on the assumption of cheap oil. For example, they are building roads and automobiles as if it were America in the 1950s. It will not work. America’s economy boomed because oil was truly cheap, and it was readily available right here without the need to import vast quantities of the stuff.

Today the price of gasoline in China has risen to around 70 U.S. pennies a liter, or about $2.66 per U.S. gallon. This is nearly double the price just four years ago, and is contributing to a 6.5 percent inflation rate in the Middle Kingdom.

That spells real trouble for the Chinese economy, which many have predicted will become a major power in the world. I beg to differ. Remember in the late 1980s when Japan was spoken of in similar terms? It was considered an absolute certainty that Japan would become the world’s leading economic powerhouse. As so often happens, boom was followed by bust and the Japanese are still trying to climb out of the hole in which they found themselves. Will China suffer a similar fate? I believe so, and the sustained high price of petroleum will play a major role in their fortunes.

According to The Economist, China is pressurizing its two major state-owned oil companies,

[which] account for most refining, distribution and fuel sales in China. Their heads are appointed by the Communist Party and hold ministerial rank. If the party tells them to get more fuel to the market, they would be wise to obey, regardless of the cost to their companies. But it is not so simple. The companies are slaves to the market as well as to the party. Even cash inducements have not worked.

Threats and incentives cannot make additional oil magically appear. Already the Chinese are the largest contributor to additional demand for the world’s supply, and while that has brought more product to the Communist power, it has also served to boost prices everywhere including in China itself—and appears to be insufficient to slake China’s thirst for oil.

The Economist quotes energy consultant Han Xiaoping, [who] “says the government might raise prices again before the end of the year to keep the oil majors happy. It may have to make a habit of it.”

Indeed. Oil will never again provide a cheap road to economic growth, and those nations most reliant upon it and lacking domestic resources will suffer the most. I probably do not need to remind you that included on that list are the U.S. and virtually every first world nation except perhaps Norway. The more pressure that is placed on world supplies, the higher prices will rise because there is no “pressure valve” of untapped resources to fill the gap in demand.

In the long term, I believe that higher gasoline prices are a positive development because they will absolutely force the move to alternative energy, greater conservation, and acceptance of more economical cars. But the road ahead is a rough one indeed, and the brighter future that might await when the world is no longer hopelessly dependent upon petroleum is only a glimmer on the horizon.

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