Politics of oil

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Politics of oil Published: September 6 2000 19:01GMT

The rising price of oil has become one of the year's biggest economic and political issues. Public protests about the cost of energy, as well as worries about the impact on business and inflation, are forcing governments to think hard about what their response should be. But despite its importance, this is a problem that they can do little about.

Next week's meeting of the members of the Organisation of Petroleum Exporting Countries is unlikely to provide much relief. There is no consensus within Opec for further quota adjustments, largely because many countries are now operating at full capacity and will only lose out if production rises. A moderate increase of 500,000 barrels per day might be the best deal that can be reached.

Only the US has much leverage over Opec's deliberations - and that is restricted mainly to Saudi Arabia. Publicly calling for more oil to be pumped could actually be counter-productive, because some Opec countries, particularly Iran, are loath to be seen to be bowing to western pressures.

Even if there were a generous quota increase, other factors are likely to keep prices high for some time to come. US stocks, particularly of heating oil, are at historic lows. Demand for crude is high because of strong global economic growth. And winter is fast approaching in both the US and Europe, two of the biggest global oil consumers.

Easing global growth, increased production by non-Opec countries and the end of the cold weather might finally take the pressure off prices sometime next spring. This prospect, though, is contributing to Opec's reluctance to act. With quotas already above the levels of the 1990s, the cartel does not want to raise production further, only to face a supply glut next year.

With the prospect of high energy prices for months to come, governments in some countries have bowed to public pressure and cut fuel taxes. It is unwise, though, to adjust taxes in response to volatile commodity price movements.

Only if the oil price rise appears likely to last should governments consider adjusting taxes, though even here the argument is weak. In any case, $30-plus oil is unlikely to last very long - not least because Opec countries know that high prices will eventually erode their market share, by prompting investment in new oilfields and the use of alternative energy sources.

The only valid public policy response to higher energy prices is to prevent them from feeding through into the general level of prices and wages by adjusting monetary policy. Other than that, governments should just sit tight - and hope for a warm winter

http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT39609CTCC&live=true

-- Martin Thompson (mthom1927@aol.com), September 06, 2000

Answers

What planet is the guy who wrote this living on? Ho, hum, warmer weather next spring will put all this inconvenience behind us. It's plain to see that he has not delved into the underlying facts.

-- Billiver (billiver@aol.com), September 06, 2000.

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