by Matthew Lynn
03-07-05
A good rule of thumb in economics is that if French President Jacques Chirac says it, it must be wrong. You just need to figure out why.
Earlier, the beleaguered French president was fretting about the soaring price
of oil. Global growth had been hit by "tensions" over oil prices, he complained,
before going on to warn that "oil posed a real problem for the management of the
world today".
In fairness, he has plenty of company worrying that with the oil price touching $ 60 a barrel, the world economy may be about to have a retro, 1970s feel to it. Tired newspaper sub-editors are dusting off their "over-a-barrel" headlines. Truck drivers will be wondering who they can blockade.
The European Union's monetary affairs commissioner Joaquin Almunia was also
saying earlier that expensive oil would cut growth in the euro zone. The
International Monetary Fund (IMF) is also concerned that growth worldwide will
be damaged. The British Chancellor of the Exchequer Gordon Brown is nodoubt
already preparing to blame the oil price for the sudden chilling of the British
economy.
Other politicians have been rounding up the usual suspects -- hedge funds, speculators -- and blaming them for high oil prices. Wolfgang Clement, the German economics minister, has already spoken of the need to "drive away speculators" from the market. Brown has been campaigning for more "transparency" in the market and last year tried to lean on OPEC to increase supply. Maybe they need a tax credit or two.
Lots of respectable-sounding people, and even economists, are arguing that
expensive oil is potentially damaging to global growth. The trouble is that many
of their claims don't stand up to serious scrutiny.
Oil belongs to a small group of commodities that stops people from thinking straight. The other one is gold. For some reason, whenever oil is under discussion, all the standard, accepted rules of the economics textbook get forgotten.
In truth, the soaring price of oil is nothing to worry about. Here's why.
Expensive oil is not nearly as damaging as most people suppose, and a free market is an efficient machine for bringing supply and demand into balance. There is no reason for thinking that oil is any different. Anyone filling up their car with petrol will be cursing the soaring oil price. So will those running factories that use oil or any of its by-products.
What is commonly forgotten is that all the extra money everyone is paying out
for oil doesn't just disappear into some vast bank account in Riyadh. It gets
re-cycled back into the system.
So although expensive oil might be bad for some people, it is good for
others. Shareholders in BP and Shell benefit. So does anyone working in oil or
any of its related industries. Governments benefit from higher taxes.
And, naturally, the oil producers benefit to. They won't just sit on the money.
They will spend or invest it, since those are the only two things you can do
with money (even if you leave it in the bank, the bank lends it to someone who
wants to spend it). Either way, it finds its way back into countries' economies.
The UK benefits from a strong oil price. John Butler, UK economist at HSBC, points that sterling remains a petro-currency even though our net oil exports are negligible. Expensive oil helps keep sterling strong, even though its fundamentals are pretty weak.
The British economy benefits in other ways. The Saudis buy our tanks. The
Russians buy houses in London's fashionable areas. We hear a lot from the people
who are hit by rising oil prices. We hear much less from the people who benefit.
There is no reason why a rising oil price should necessarily be bad for the UK economy. Lots of things get more expensive -- houses, plumbers, our own wages. That doesn't hit growth in an economy. Neither should rising oil prices. The markets are already working to redress balance and supply. As the price rises, demand goes down and supply rises. You can already see it happening.
On the demand side, new hybrid cars thatrun on a mixture of electricity and
petrol are coming on to the market. Honda has a new model that averages almost
70 miles to the gallon. Likewise, Airbus is busy building more fuel-efficient
planes such as the new A350. Factories will already be experimenting with ways
to cut back on their energy consumption. Supply is edging up as well.
Almost every day brings news of another oil exploration company floating on the Aim market. A few of them are bound to hit gushers. Alternative technologies are being explored. There is a revival of interest in nuclear power and hydrogen powered cars.
And only very recently, a group of nations agreed to build the world's first
experimental fusion station, using the same nuclear process that powers the
stars to create cheap, safe energy.
In time, all of that will start to increase the supply, both of oil and other
energy sources. Until that happens, the high oil price is rationing the existing
over-stretched supplies. Supply and demand and being bought back into balance --
just as the textbooks say they should.
That is happening all the time, for millions of different products. It is part
of healthy, functioning economy -- not a sign of recession.
So when France's Jacques Chirac, Germany's Joaquin Almunia and the UK's Gordon Brown complain about oil price prompting a slowdown in global growth, what they are really trying to do is deflecting attention away from their own economic failings.
Higher taxes, expanding, unproductive public sectors, and politicians who think
they know better than the market -- those are things that really might cause a
recession. To them, oil is just a thick black smokescreen.
Source: The Business