VHeadline.com oil industry commentarist Andrew McKillop writes: Almost anytime is a good time for Alan Greenspan and other presidents or directors of central banks in Europe and Japan to remind the faithful that “extreme oil prices” act as a kind of energy tax, and in official central banker mythology ‘can only reduce economic growth,’ and of course raise inflation.
Greenspan’s most recent rework of this myth was on September 8, followed closely by the president of the San Francisco Fed, Janet Yellen, who for her part estimated that current “extreme oil prices” act as a US$65 billion tax on consumers and companies in the USA.
Almost any fit-to-print ‘expert’ — for example those employed by large finance houses including Merrill Lynch and Smith Barney — faithfully relayed by oil sector ‘experts’ such as oil economists at Wood Mackenzie, will stride to the microphone or rush to print their latest, sumptuously documented study which ‘proves’ that current “extreme oil prices” have cut world economic growth by 0.5% or 0.7%, or perhaps even 1% … in fact any number will do!
The September 15 OPEC meeting was of course eagerly attended for ‘signals,’ but apart from ritual statements by Saudi and Kuwaiti, and other oil ministers that “current prices are too high,” little was actually done.
The now ritual announcement of increased production and exports, by producers who are very surely right at the limit of their capacities to produce, led to no more than a few cents shaved from the barrel price.
On the NYMEX, these days, US$45/barrel is the start price, and the outlook remains upward … for a host of reasons including the fact that OPEC’s bluff is being called every day. Increased OPEC production by any really meaningful amount, for example one year’s growth of world demand … that is 2.5 million barrels/day (Mbd) … is out of the question.
OPEC can perhaps achieve 29 Mbd on a sustained base, and may or might get to 31 Mbd as its ultimate peak (on a membership base including Iraq) … but none of this is sure and certain. Production and export capacity falls are at least as possible as any sustained rise.
Alan Greenspan and his look-alike, talk-alike central banker friends have a well-rehearsed line of patter concerning the world economic impact of higher oil prices … lower economic growth and higher inflation. This is a pity, given that real world, real economy impacts of higher oil and energy prices are pro-growth, and as long as growth accelerates it is not certain, and even less necessary or inevitable that inflation should rise.
Greenspan may well receive OECD reports, even if he does not read them. The most recent OECD report on world economic growth trends (published on September 22) shows dramatic uprating and revision of growth trends for almost every country excluding the USA.
In some cases the upward revision relative to the June estimate by the OECD secretariat is by over one-half. One example of this is Germany, whose growth outlook is raised to 1.7% (real GDP, 2004-2005), from the June estimate of 1.1%. Italy, which in June was classed by the OECD as being close to recession and able only to achieve about 0.8% growth of GDP in the next 12 months is now estimated as being able to achieve 1.3%. Japan’s growth outlook is raised from 3% or less, to 4.4%. France’s outlook is also revised upward, as with most any OECD country except the USA. World economic growth, according to the OECD, is without question increasing … as oil prices increase.
Nowhere is inflation considered by the OECD economists to be a menace.
We can suggest that the Bush regime’s ‘trickle down’ income tax cuts, so warmly approved by Greenspan, are only delivering a rather weak, hesitant and job-free recovery in the USA, but the ‘trickle up’ world oil tax due to “extreme prices” is delivering strong economic growth worldwide. This pro-growth “oil tax” works through increasing revenues to generally lower-income, non-OECD countries.
- In first case this concerns the OPEC and non-OPEC exporters, where the extra revenue is rapidly spent … for example on imports of machinery and equipment, household goods, building materials, foodstuffs and so on.
In addition, any increase of oil prices triggers growth in the price of other “real resources,” firstly of metals and minerals, and subsequently of agro-commodities. This oil tax-related growth of raw materials prices benefits a large number of lower income countries.
In fact, even very poor ‘real resource’ exporter countries can and do benefit from “extreme oil prices,” as proved by any check through of social and economic indicators for very poor countries during the high oil price period of 1975-1984, compared with the low oil price period of 1985-1999. This explains why high oil prices do not, repeat not necessarily and immediately penalize poor oil-importer countries, as the International Energy Agency claims to believe, in its new-found elan of concern for very poor countries, directly related to its campaign for bringing down the oil price.
Higher oil prices increase world economic growth by raising ‘real resource’ prices, through what we can call ‘the revenue effect.’ The pro-growth impact of oil does not stop there, because fast increasing values of world merchandise trade due to higher ‘real resource’ prices directly leads to fast growth of world liquidity … the quantity of money in circulation. The trend for world liquidity is close-linked to oil price changes (both up and down), but in the current context there is also growing world liquidity due to fast industrialization of, and growth of exports from China, India and other countries. This directly translates to additional growth of the value and volume of world trade. World trade is now growing at its fastest rate for over 15 years, which again is concrete, cast iron proof of fast economic growth.
Greenspan and his central banker colleagues can likely brush aside the latest OECD growth estimates … who needs figures when myth and ideology is being defended? … but coming oil price rises, even to US$60/bbl, will not seriously change the economic outlook.
Only beyond about US$75/bbl can we expect inflation to take the driver’s seat, and especially in the most oil-wasteful OECD countries, starting with the USA.
The real danger, however, come from geopolitical instability … that is Middle East war … extending from Iraq to Saudi Arabia and to Iran. In the last case, Iran’s nuclear program and the US and Israeli reaction to this program could lead to a devastating loss of oil supplies to the world, following ‘surgical bombing’ of Iran’s nuclear installations, and the almost certain Iranian oil embargo that results from this.
- Iraq is now sliding rapidly into civil war and cannot in any way be counted as a reliable supplier of even small amounts of crude, perhaps never re-attaining its early-1980s peak export capacity of 4 Mbd.
Oil prices will therefore stay high … feeding back as accelerated economic growth and ever rising world oil demand.
Andrew McKillop is a former expert-policy and programming, Division A-Policy, DG XVII-Energy, European Commission, founder member, Asian Chapter, Intl Assocn of Energy Economists. Currently in Paris (France) he is available for cunsultation and research assignments. You may contact Mr. McKillop by email at email@example.com