Pointing Fingers on High Oil Prices

In a column titled “Petro Populist Myopia,” Diane Francis of the Financial Post makes a good point about who should really receive the blame for the runaway prices increases of oil:

Prices are soaring, in part, because oil is denominated in U.S. dollars and the dollar has declined, thanks to Washington’s overspending on wars, trade, subsidies and government budgets. Investors have also abandoned credit markets since the (thanks to U.S. deregulation) subprime meltdown and put their money into real assets instead. But the biggest reason prices have been soaring is the future supply and demand outlook. The Beijing Olympics this summer will open the world’s eyes. In the next 17 years, plans are to move 300 million Chinese from farms to cities that have yet to be built. They will want roads, cars, buildings and streetlights. The equivalent of five New Yorks, and some 50,000 skyscrapers, are on drawing boards. Already, some 174 subway systems are under construction and a power plant is completed every month. China already has 200 cities bigger than Dallas.

Added to this are the economic development plans underway in other parts of Asia, Brazil, central Europe and the Middle East. More than half of the world economy is located in emerging, or poorer, countries.Oil prices are being driven up because the world keeps buying the stuff, even at these prices, and will continue to do so. In the past when oil prices jumped this dramatically, there was a corresponding collapse in demand and accompanying price drop. Not this time — because the price is not as high, in relative terms, as was US$36 a barrel oil in the early 1980s.Cutbacks in usage and/or greater fuel efficiencies in rich countries such as the United States will not offset the massive growth in consumption in the world’s emerging economies.Ironically, the poorer these countries are the more they will increase demand by subsidizing energy use to help their economies, farmers, businesses and families.On the supply side, the problem is another irreversible trend: About 80% of the world’s oil supplies are owned by inefficient or inept government corporations or agencies that are not developing more reserves because they are used by governments as cash cows to buy votes or palaces or armies or terrorist attacks.One of the worst examples is Mexico’s Pemex, whose production dramatically declines despite huge reserves. Pemex ships most of its cash flow to Mexico City, which represents 40% of its federal government budget.