October 7th 2000

  Buy Issue 2593

Articles from this issue:

Editorial: A lesson from the Olympics

Cover Story: Oil: who is blackmailing whom?

Canberra Observed: Freedom of religion or freedom from religion?

The Economy: John Stone's reflections on the declining dollar

Straws in the Wind: Long day's journey into night

The Media

Family: Long-term legacy of divorce


Defence: Regional crises require lift in defence spending

Comment: Globalism and democracy: the challenge ahead

International Affairs: West papua, the next East Timor?

Drugs: Compulsory treatment: Sweden shows the way

Britain: Whitewash over East German espionage in UK

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Cover Story: Oil: who is blackmailing whom?

by Colin Teese

News Weekly, October 7, 2000
Colin Teese, formerly Deputy Secretary of the Department of Trade, believes governments are being disingenuous when criticising OPEC for rising oil prices.

All it takes is a good old fashioned crisis, or perceived crisis, to shift the focus of world leaders. When the G7 (the regular get-together of the world's seven largest economies) meets this week, what do you think its focus will be? How to have the market system deliver 'new economies' to the world? How to take the undesirable out of globalisation? Nothing of the kind. The focus will be oil. Oil prices, that is.

Already the pressure has begun. Last week the Chancellor of Germany demanded (note the word) that the oil producers reduce the price of oil, "in the interests of the global economy". The last phrase we can take as code for "the interests of the global domination of European and North American large-scale business, especially manufacturing".

$50 billion fuel bill

The barrel price of oil has indeed risen significantly over a reasonably short time frame. The US is said to have added another $US50 billion to its oil bill. The same will have been true of Europe. No wonder they are displeased.

But why are has the price of oil risen so much so quickly? Last week's Australian Financial Review wasn't at all sure.

Optimistically, though unconvincingly, it opined that a new oil crisis is unlikely - because the developed world is no longer a prisoner to oil as it was in the seventies. Perhaps, but remember this: at the time of the first oil shock, the US was self-sufficient in oil and therefore in a position to significantly influence price. Now it is not.

As to the present position on supply and demand, that is by no means clear. The AFR asserts that consumption of oil remains at 1978 levels, while output has grown hugely. Precisely how this combination of circumstances could possibly exist alongside large price increases was left unexplained.

The figures don't add up, unless OPEC has somehow managed to suspend the laws of supply and demand.

And that's not all. While OPEC Ministers recently agreed to increase output by 800,000 barrels per day, nothing like this amount is finding its way onto markets. Some oil no doubt will be adding to consuming nations' security stocks. But it is also true, and always has been, that what OPEC Ministers decide collectively may not be what individual producing countries actually do.

Undoubtedly, some producing countries are unwilling to increase production. Circumstances have provided them with a rare opportunity to exercise market power and we can hardly expect them not to exploit it.

How has this become possible? It seems they believe, as a group, that the supply of their product is running out. In that circumstance, sacrificing output for price best serves their individual interests - both the long and short term.

Now opinions differ as to the level of the world's remaining oil reserves. And estimates are notoriously unreliable, since most are driven by self-interest. Obviously, consuming interests, wanting cheap oil, keep insisting that reserves are plentiful. If they are right, then they need have no worry. Sooner or later producers will be forced to the same conclusion, and any cohesion within the group to restrict supplies will be destroyed. Output will re-emerge as a more important consideration than price. This is precisely what happened after the first and second oil crises a generation ago.

Many of the oil companies, however, think pessimistically. Estimates differ, but some believe that meaningful supplies may be limited to twenty or thirty years. All are developing future plans accordingly.

Against this background, the arrogance of the German Chancellor's 'demand', when you think about it, is truly breathtaking.

While ever national sovereignty prevails, and short of gunboat diplomacy, oil does, after all, belong to the producer nations. And if oil-pricing policy gives rise to a conflict of national interest between the producing and consuming countries, then producing countries can't be blamed for putting their own national interest first. If only our government could follow their example!

No less arrogantly, oil consuming European heads of governments (including Chancellor Schroeder) blame oil-producing countries for the high price of oil.

In fact oil producers could make the same complaint that other primary producers constantly make. The price they receive is a fraction of what the consumer pays for the end product. Except, in the case of oil, the disparity serves not the consumers, but government tax collections. Most of the price of petrol - and diesel - at the pump, is tax.

In Australia, one of the lower taxing countries, it is almost half the pump price, and the Prime Minister constantly assures us that budgetary demands do not allow that it be lower. Presumably, it is the same in Europe where the tax is much higher.

And, of course, the fact that the price of the end product can support such high levels of tax, confirms that the barrel price of oil is actually too low. Certainly it means that producing countries are subsidising the treasuries of European user countries. Chancellor Schroeder's demand is more about maintaining Germany's revenue base than providing cheaper oil.

There is nothing new in this selective approach to sovereignty as interpreted by Europeans, as this writer can relate from personal experience.

Oil crisis

In 1977, while I was based in Geneva, I was required to spend eight days in every month at the World Energy Conference then convening in Paris. This conference, then convened in the wake of the first and second oil crises, was aimed at getting some kind of co-ordination, as it was called, to ensure that Europe and Japan, in particular, received a secure supply of the energy products they required.

As Australia's delegate, I was constantly being lectured about the obligation we had to ensure that users were guaranteed security of supply of energy products. My response, somewhat indelicately, was to ask what would be the quid pro quo for Australia - a guarantee to purchase at a guaranteed price? My suggestion was met with a stony silence.

I wasn't surprised by the arrogance of the European demand a generation ago, any more than I imagine the oil producers are now. Then, as now, I understood that power develops an attitude of mind, which remains even where circumstances have diminished the ability to exercise power.

The backlash of the hike in oil prices is now worldwide. In Australia, as in Europe, truckies are engaged in strategic blockading, not dissimilar to the tactics adopted by S11 at the World Economic Forum. (Let us hope that this time Victoria's Premier has more sense than to characterise them as 'fascist'.)

The truckies have every right to be angry. And quite rightly their anger is directed at the government.

They have been encouraged into competition with other forms of transport by a government well aware of the benefits to revenue derived from the fuel the truckies use. Now, as the price of oil rises, and the government insists on the same revenue take from diesel fuel, truckies face bankruptcy.

Unless the government can find a way around the problem which preserves the revenue base - while at the same time maintaining the viability of the truckers - fuel prices could become an election loser in their own right.

To this observer, at least, a solution is not in sight. For his own sake let us hope that Mr Howard is more creative.

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