January 5, 2008

January 5, 2008 | Commentary on Europe

The Real World: Oil at $100

Is $100 oil a cause to celebrate? The answer is, yes -- in the short term, and no -- in the long term. The answer also depends on who you are and where you sit.

Many oil exporting Middle Eastern government officials may think that the oil bonanza is here to stay. However, oil revenue is notoriously cyclical, with ups and downs wreaking havoc in the national budgetary process.

Petrodollars -- or petro-euros these days -- also have a nasty habit of causing a national addiction, crowding out non-oil sectors and making countries, business, and individuals dependent on one commodity only. This is hardly a prescription for a healthy economic model.

Yet, oil companies' owners, executives, and shareholders may be opening bottles of champagne, despite the end of the New Year's celebrations. But the business people, who run their agricultural, transportation, tourism, and airlines, are threatened with the rising production costs caused by high fuel prices.

Commuters are unhappy as an ever greater share of their incomes is allocated to transportation. Tenants and homeowners pay ever higher heating bills as energy costs correlate to oil prices.

And these are high: The year opened with $100 for a barrel of light sweet crude at the New York Mercantile Exchange, and there is no end in sight. And the rest of the economic omens are dire.

The year 2008 has begun with the greatest stock market price slide since 1983. According to Bloomberg News, the Standard & Poor's 500 Index lost 21.20, or 1.4 percent, to 1,447.16, the most to start a year since it fell 2.8 percent on Jan. 2, 2001.

The Dow average slipped 220.86 points to 13,043.96, predicting a weak year in the markets. The NASDAQ Composite Index decreased 42.65, or 1.6 percent, to 2,609.63.

Gold is in almost-record territory at $860 an ounce, although lower than the all-time high of $875 in 1980.

The Europeans in particular are feeling the pressure: The EU has cut growth estimates for 2008 from 2.5 percent to 2.2 percent, and the EU Economic and Monetary Affairs Commissioner Joaquin Almunia predicted a possible further downturn, below 2 percent, if the oil prices keep soaring.

There are at least three threats to the current Middle Eastern oil prosperity. One is macroeconomic, one is policy/regulatory, and one is technological.

On the economic side, the quintupling of oil prices since 2002 is creating a drag on the largest economies in the world: Europe and the United States. High energy prices hurt the developing nations even more. And even the high growth engines, such as China and India, may start to slow down. If this occurs, oil prices are likely to plunge.

High oil prices are likely to spawn creation of tomorrow's fuels, including sugar cane ethanol, genetically modified and fermentable cellulose, and others -- just as the scarcity of wood in England caused the switch to coal as the source of heat for the burgeoning steam engine economy in the 18th century.

Visionaries fund experimental car competitions. A paltry $10 million prize in grant money is likely to contribute to development of cars capable of driving over 100 miles per gallon of fuel.

Finally, on the policy and regulatory level, increasing concerns in the developed world about CO2 emissions and the climate change are likely to squeeze out oil in favor of natural gas, nuclear, and renewables (solar, wind, hydropower, and others). These concerns are also likely to give a boost to energy saving technologies that are likely to lead to a drop in demand for fossil fuels.

Gulf states and other oil and gas producing countries, from Algeria to Azerbaijan, need to look the future squarely in the eye. The oil bonanza will not last forever.

To survive in the post-oil world, these countries need to start preparing now, when the times are good, just as Biblical Joseph filled the Pharaoh's warehouses in Egypt while the bumper grain crops lasted. Today this means preparing for competition and integration in the global economy for the rest of the 21st century.

This means creating excellent education systems which teach science and technology, and give students access to the wealth of historic and social sciences materials that adequately represent the richness of our world's cultures.

These, as the global practice shows, are educational establishments in which both men and women enjoy equal rights and are integrated, which thrive on diversity and do not segregate on the basis of gender, creed, and national origin.

Being future-oriented also means a transparent and equitable legal system based on the rule of law, complete with an independent and competent judiciary. Without it, those who seem today the most blessed, tomorrow may found themselves cursed.

Yes, the usual suspects, from Saudi Aramco to Rosneft and PDVSA may be celebrating oil at $100 today. But without preparing for the future, some oil states may -- in a few decades -- return to what they once were: the harsh expanses of sun, sand, and sword.

Ariel Cohen is senior research fellow at the Heritage Foundation and senior adviser to the U.S.-Ukraine Business Council.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

First appeared in the Middle East Times