When Matt James saw the oil price hit $100 (£50.65) a barrel last week, he was
spooked. Like most of us, he has a lifestyle that largely runs on what is
becoming a very expensive commodity.
The 28-year-old financial controller recently bought a second car after moving
into a three-bedroomed house in Berkshire with his wife Sarah and two
children.
“We drive everywhere - to take the kids to school, to commute, to get to the
shops - and now we are quite concerned. The price of oil is already being
felt at the pumps, with petrol prices rocketing,” he said.
“We are all going to have to tighten our belts. A foreign holiday for the
family this year would be great, but it’s probably not going to happen. My
worry is that if high oil prices continue at this rate there will be a
massive knock-on effect.”
It’s already beginning. On Friday Npower, Britain’s fourth largest energy
supplier, said it was raising electricity prices by 12.7% and gas bills by
17.2%.
Like oil, wholesale prices for gas and electricity have gone up sharply, by
60% and 66% respectively; and now rises are feeding through to customers.
Other energy suppliers are likely to follow Npower’s lead.
Food prices are already up 5.3% on a year ago, according to official figures,
and will be driven even higher by rising energy prices, which add directly
to the cost of food production and distribution.
Although the oil price slipped back slightly last week after hitting $100,
many experts predict it will go higher. The investment bank Goldman Sachs
reckons it could reach $105 this year. Germany’s DIW economic research
institute goes even further: it predicts that in five years the oil price
will be $150 a barrel, rising to $200 in 10 years.
Not everybody agrees that the only way is up. The investment bank Lehman
Brothers predicts an average of $84 a barrel this year, while its rival
Morgan Stanley says prices will average $80.
But whether it’s $80 or $100, a significant shift has taken place. A decade
ago, oil traded at just $10 a barrel. In the past four years alone the price
has quadrupled. The days of cheap oil are over and, since oil lubricates the
modern world, the high cost poses many questions.
What is driving the rise? How will it affect consumers? And what are the
longer-term implications for the balance of power across the globe? Is this
the beginning of the end for the world as we know it? EARLY last Tuesday,
members of a street gang called the Niger Delta Vigilante arrived outside
the Hotel Presidential in Port Harcourt, Nigeria, and opened fire. The lobby
of the hotel, a popular haunt for government officials, was sprayed with
bullets. In the ensuing gun battle, one security guard, four policemen and
several of the attackers died.
Oil investors around the world took fright.
Port Harcourt is the centre of Nigeria’s oil industry, which pumps about 2m
barrels a day – a significant chunk of global consumption. The city has been
plagued with violence as gangs vie for power; the fear that supplies might
be interrupted nudged prices higher.
The next day in New York, a lone trader, Richard Arens, tapped an order into
his computer as the markets were beginning to wind down. He bought only
1,000 barrels of crude but the deal was enough to break records: he became
the first person to pay $100 a barrel.
It was hugely symbolic, even though the price later slipped back. After
adjusting for inflation, oil was within a whisker of the all-time high it
hit in 1980, a crisis that contributed to economic downturns in the West.
Such market jitters and financial speculation are only part of the impetus for
high oil prices, however. The longer term reasons include the strongest run
of growth for the global economy since the early 1970s; higher than expected
demand from China and India; and an absence of readily accessible new
sources of oil supply. China is now the world’s third largest consumer of
oil, sucking in 7.5m barrels a day.
For consumers and small businesses the results are most immediately evident in
petrol prices of 104p a litre or more.
Keith Toomey, who has run a courier business in Oxford-shire for 16 years,
said: “It’s getting out of hand, it’s ridiculous. I can’t afford to do the
job any-more. I’m going to have to start adding an extra £10 or £15 per 100
miles for the cost of fuel.”
People were already reconsidering the types of vehicle they choose to buy.
Sales of 4x4 vehicles in the first half of last year fell by 7% in London
and 5% nationally. In the US, sales of some SUV gas-guzzlers have plummeted.
Motorists are also switching from petrol to diesel, to extend consumption.
Long-haul travel is also going to be affected. Last week, United Airlines, the
second biggest carrier in the US and a competitor to British Airways, raised
fares to compensate for what it called “unprecedented fuel costs”. Analysts
expect other airlines to do the same.
Technology may ultimately come to the rescue: last week a single-seater plane
powered by a rechargeable battery took to the skies. But it is likely to be
years before such notions have any commercial application.
The secondary impact of $100 oil will affect consumers through financial
markets. High oil prices, rising domestic energy bills and other
inflation-ary forces may prevent the Bank of England from cutting interest
rates, which some economists believe is needed to ward off a sharp downturn
in the economy. The Bank will make a decision on rates this week.
Jessica Henry, a 25-year-old nurse in Oxton, Wirral, is one of those who will
find life difficult if conditions do not improve. She lives in a
one-bed-roomed flat that she is buying with a £95,000 interest-only loan.
She is due to remortgage later this year, and credit conditions have already
tightened, as lenders charge more and impose stricter conditions.
“I’m going to have to remortgage by November,” said Henry, who earns between
£20,000 and £25,000 a year. “I’m expecting it to rise by £200 to £300 a
month, which would put pressure on me financially. I would be able to cope
but the idea that it could be even more is quite scary. I’m very nervous to
be honest.”
So far the economy has held up well in the face of high oil prices but some
economists fear that the combined effect of the credit crunch and rising
energy bills will push many households over the edge.
“Sadly, many individuals spend up on credit at Christmas and pay no heed to
the financial warning bells,” said Mike Gerrard, head of the personal
insolvency practice at accountants Grant Thornton. He expects 120,000 people
to go to the wall this year.
Others will have to cut back on their expenditure and use of energy. Official
figures suggest that high prices may already be having an impact on energy
use. In 2006, the UK’s total consumption of energy was the equivalent of
232m tons of oil, 1.1% lower than in 2005, led by a drop in the use of gas.
The latest figures, for the August-October period of last year, show that
energy use in homes, shops and offices was down another 0.1% (after taking
weather conditions into account).
Some observers fear the energy crisis will go beyond high prices into outright
shortages. David Strahan, author of The Last Oil Shock: A Survival Guide to
the Imminent Extinction of Petroleum Man, is one.
“We are extremely poorly prepared,” he said. “People will have difficulty
paying to keep their house warm, to fill their car’s tank, to go on holiday.
We saw in 2000 with the petrol protests just how fast things get tricky.
People go into hoarding mode . . . and then the whole system unravels very
quickly.”
Environmental campaigners, however, find something to celebrate in high energy
prices, because the increased costs will change the way we behave.
“The balance will shift to fuel saving,” said Ben Stewart of Greenpeace. “It’s
been a carrot and stick move towards greener technologies and the stick is
getting a lot bigger.”
THERE is another side to this picture. At $100 a barrel, oil is funnelling
vast sums of money from the consumers to the producers, mainly in the Middle
East, Russia and Venezuela.
In the 1990s, while much of the world enjoyed a long upturn, the oil nations
struggled. Five years ago, after a long period of low oil prices, the
economies of Saudi Arabia, the world’s biggest producer, and the other big
oil exporters were under strain and social discontent was rising.
Since then, however, the value of the producers’ oil exports has rocketed.
They are now worth $750 billion (£380 billion) a year to the Middle East.
Governments there have paid off debts, invested in new industries and are
building vast new infrastructures. The property boom in the Gulf makes
Britain’s housing market look like a backwater.
Saudi Arabia is building four new cities, including the $27 billion King
Abdullah Economic City, said to be three times the size of Manhattan.
“The oil producers have got a lot more absorptive capacity – they can use a
lot more wealth,” said David Butter, Middle East expert at the Economist
Intelligence Unit. “If you look at Saudi Arabia, it is investing a lot back
into oil, gas and petrochemicals. Others are building up other sectors of
their economies.”
Middle Eastern oil producers, and the booming economies of Asia, now have so
much cash sloshing around that they are buying large stakes in western
assets. Their so-called “sovereign fund” investments are estimated at $2,000
billion and could reach $12,000 billion by 2012, according to the
International Monetary Fund.
When Citigroup, the US bank, found itself in need of help because of America’s
sub-prime mortgage crisis, it turned to Abu Dhabi’s Investment Authority.
UBS tapped the Saudi royal family. Other troubled banks have looked to China
or Singapore.
Should this be cause for concern? Willem Buiter, former chief economist of the
European Bank for Reconstruction and Development, has warned: “As agents of
the state, these funds are always potential instruments of foreign policy.”
It is not just in the Middle East that oil money is being used to buy power
and influence. Hugo Chavez, Venezuela’s erratic president, has been offering
cheap oil and low-cost loans throughout Latin America. High oil prices have
transformed Russia from an economic bastketcase into a powerful force that
allows President Vladimir Putin to strut his stuff on the world stage.
For some, the return of Russian power is the most alarming aspect of the
energy price boom. Ten years ago, Russia defaulted on its bonds. Now it has
built up currency reserves of $425 billion and a $150 billion
“stabilisation” fund, to be used for unforeseen events.
“Putin’s whole ethos is that if Russia can’t be a military super-power, it can
project economic power,” said James Nixey, manager of the Russia and Eurasia
programme at the Royal Institute of International Affairs. “The energy
weapon is not the all-encompassing thing Putin thinks it is, and in some
ways Russia needs Europe more than Europe needs Russia. But it is there.”
Yesterday it emerged that Gazprom, Russia’s state-owned energy giant, is
trying to strike a deal to give it access to vast energy reserves in
Nigeria, which has previously dealt mainly with western energy companies.
This sent jitters through European governments - not least because Russia,
which is the source of much of Europe’s gas, has previously threatened to
cut off supplies to customers who do not meet its demands. IT all adds up to
a significant shift of financial, economic – and ultimately political -
power, say some experts. The Middle East has two-thirds of the world’s oil
reserves and in an era of $100 a barrel, oil will continue to rake in cash
from the rest of the world. So will Russia and Venezuela.
China, India and the other fast-growing economies of Asia are not immune from
high oil prices but have sufficient momentum for it not to slow them in
their tracks. They also have growing financial muscle and are using it to
invest strategically in the advanced economies.
It is these advanced economies, however, that are struggling under the weight
of the credit crunch, high energy prices and their own indebtedness. The
economic baton is being passed on, it appears, and high oil prices are
accelerating the process.
Motorists watching the pounds clock up on petrol pumps might have more
pressing concerns than such changes; but their children could find
themselves living in a world where the balance of power is very different.
Niall Ferguson, the historian, sees the present record oil prices and the
global credit crunch as analogous to the Seventies – not the 1970s, but the
1870s, when the once mighty Ottoman empire lost economic, financial and,
finally, political power.
“Then the shift was from the ancient oriental empires to western Europe,” he
said. “Today the shift is from the US – and other financial centres– to the
autocracies of the Middle East and east Asia.”
If he is right, then the lives of mid21st century western consumers may become
unrecog-nisable compared with today’s.
Echoes of the 1970s - when Britain was almost on its knees
WHAT HAPPENED IN THE 1970s OIL SHOCKS?
In October 1973, Middle Eastern oil producers, angry at the West’s support of
Israel, restricted oil supplies. In three months the oil price rocketed from
just over $3 a barrel to nearly $12.
Petrol prices soared. Shortages loomed. The government printed 16m petrol
rationing books, though in the end they were not used.
Inflation hit 25% in 1975 and the nation’s finances fell into crisis. Jim
Callaghan, Labour’s prime minister in late 1976, had to turn to the
International Monetary Fund for £2.3 billion emergency funding, a record
bail-out.
Barely had the economy recovered than a second oil shock was precipitated by
the overthrow of the Shah of Iran in 1979. A second recession ensued.
WHAT’S LIKELY TO HAPPEN THIS TIME?
Domestic gas, electricity and food bills will rise. Some increases were
announced yesterday; others will follow.
Petrol is likely to remain above £1 a litre, changing driving habits. Flights
will become more expensive.
Efforts to develop other energy sources will intensify. The government will
announce plans for new nuclear stations this week.
The wealth of the oil producers, particularly the Middle East and Russia, will
soar. They may use this bonanza to buy stakes in western economies. That in
turn will lead to a shift in the balance of economic and political power.
America, Europe and Britain may struggle to cope with high oil prices and
the credit crisis, but China and India are likely to carry on growing
strongly.
