by Jerome a Paris
Mon Jun 16th, 2008 at 05:04:04 AM EST
As part of the steady drip, drip, drip of information to prepare the world for the shock announcement they are to make in november that we're running out of oil, Fatih Birol is giving an interview to Foreign Policy where he repeats a number of things we've been discussing here endlessly: that demand in growing, but that the West is irrelevant in that respect, that supply is constrained, that major oil fields are declining, and that the Western oil companies are running out of oil.
But I'd like to focus on just one point here:
FP: Why aren’t more new supplies coming online, given the current high prices?
FB: The bulk of the oil has in the past been produced by the international oil companies, so-called Big Oil. But their existing reserves are declining in what they have under ownership. They have no access to new reserves, the bulk of which are in Middle East countries. In most of these countries, only the national oil company can, by law, invest. So, even though the international oil companies may have the capital and the technology, they don’t have access to the reserves. Therefore, the bulk of the growth in the future needs to come from the national oil companies, and perhaps price will no longer be the main determinant when they make their [production] decisions, because for many countries, oil is their only natural endowment. And those countries legitimately value and want to leave their one and only natural endowment for future generations.
He is essentially saying that market forces are playing a very small role on one side of the equation: supply will not respond to higher prices. Which means that demand will have to bear the burden of balancing the market. Which in turn means that if you rely only on market mechanisms, prices will need to go high enough to cause demand destruction through pain and economic dislocation.
The only conclusion to reach is that we must act on demand levels without relying only on price mechanisms - policy should explicitly target demand reduction in every possible way, including mandatorily if requires.
In fact, an indirect market mechanism might do the trick: allocate a steadily shrinking number of barrels of oil to each citizen each year, and let them use them or trade them for oil products.