This past weekend, officials of Saudi Arabia, citing concerns about global economic and political instabilities resulting from high fuel prices, unofficially indicated that the country will increase oil production by as much as 500 thousand barrels per day, which would lift its daily output to about 10 million barrels. Vague assurance was given that the production increase would be confirmed by the Saudi oil minister on Sunday, June 15, but as of the time of publication of this article, a clear, official announcement has not been made, although it might come after a June 22 meeting of representatives from oil producing and consuming countries, who will discuss the recent, rapid run-up in oil prices. By early afternoon on Monday, June 16, 2008, world oil markets were still anticipating tight supplies, with the price of oil probing record-breaking territory in the $140 per barrel range. Moreover, regardless of any increase in output level by Saudi Arabia, the trend in oil prices will remain upward.
Notwithstanding claims by U.S. Treasury Secretary Henry Paulson, Jr., that soaring energy costs are in part due to "minimal investment" by oil producing nations in new oil wells and refineries, the near-certain prospect of continuing increases in oil prices is not entirely the result of surging demand for hydrocarbon products by fast-growing countries like India and China, although the underlying supply and demand dynamics do link the surging growth of those two economies to what is happening to fuel prices right here in the United States. However, considerably more of the reason oil prices are skyrocketing is the collapse of the value of the dollar against major foreign currencies: this is driving the cost of all imports upward.
A weakening U.S. dollar makes imports from foreign nations more expensive and makes domestic exports to the rest of the world cheaper. Entirely aside from what are undoubtedly somewhat tight supply conditions and escalating global demand, the literal collapse of the greenback against currencies like the euro and the yen is greatly magnifying any increases in the price of all foreign-produced products save for those from China, a country still manipulating the exchange rate of its currency to the dollar, notwithstanding assurances to the contrary by both the Bush Administration and the rulers in Beijing.
Even the representatives of the G-8, meeting this past week in Osaka, conceded that the precipitous decline of the greenback was a primary cause of the rising price of oil (after the august body of ministers ritualistically laid some of the blame at the doorstep of unnamed, shadowy, altogether evil "oil speculators").
The graphic below, created from data available at the Energy Information Administration, shows the monthly spot price for Brent Crude from January 2000 to June 13, 2008, along with the exchange rate of the euro against the dollar.
The inverse relationship is striking, as is the recent increase in the steepness of the rise in the spot price of oil. The mirror image part of the visual relationship in the graphic above is the result of the collapse of the dollar; the acceleration of the trend is largely the result of the rising demand in emerging economies like China and India. Neither of those two causes are likely to vanish in the foreseeable future, so the cost of oil and products derived therefrom has virtually no prospect of going anywhere but further upward for a long time to come.
Furthermore, domestic equivalents of those imports will also become more expensive, too, by virtue of the substitution effect. That means those calling for bio-fuels, wind energy, solar power, nuclear power, coal, natural gas, continental or shelf oil, geothermal power, and any other source of energy as alternatives to imported hydrocarbon products will ultimately be wildly disappointed by the emerging economic reality that the cost of energy, regardless of its source, will be absorbing a greater and greater share of household and business income from now on.
The President of the United States cannot fix that; neither can the Saudis, who have little long-run incentive to do so, considering that their country and other OPEC nations will exit the 21st Century without their stores of wealth in oil reserves. It is in their best interest to convert those reservoirs into usable wealth at the highest possible price and at the swiftest possible pace consistent with maintaining firm prices that are not so high that they overwhelm the consuming world's ability to continue industrial growth.
Complicating the matter is that a positive correlation will become stronger between the price of oil and industrialized nations' rate of technological conversion away from energy extracted from fossil fuels: as oil becomes more expensive, the price-relative of alternatives will fall, which means that a price of oil that is too high will induce the research and development for, implementation of, and widespread industrial adaptations to alternative sources of energy. Hence, the oil producing and exporting nations must control the price rise to the extent possible to accelerate the conversion of their wealth from raw oil to other, more liquid assets, but at the same time keep the price from rising so quickly that substitutes become so widely and quickly adopted that remaining oil reserves become less valuable through globally lower demand.
The good news for the Oil Producing and Exporting Countries is that many nations that are net consumers of fossil fuels will, for the time being, anyway, find that domestic exploration for oil and gas and wars to secure oil and gas fields and distribution routes will remain cost effective. The domestic exploration will necessarily entail conversion and occasional destruction of environmentally sensitive ecosystems, and the wars will necessarily construct, shift, and reconfigure at least some historical alliances, as explained in the article "Hydrocarbon Battlefields," published nearly two years ago here at The Dark Wraith Forums, and result in combatant and civilian casualties. On the plus side, both exploration and fighting will lead to technological innovations in both beneficiary civilian and war-making industries, as explained in the series "The 21st Century," published here at The Dark Wraith Forums more than three years ago. On the negative side, the need for access to more domestic areas of exploration and the requirements of managing states of conflict will entail an acceleration of global trends toward more authoritarian societies, as explained in "The 21st Century, Epilogue," published last year here at The Dark Wraith Forums, whether the degradations of human and civil rights are open or hidden from common view.
Is the emerging world and its economic, military, and political dynamics complicated? Yes.
Must the world of tomorrow happen with persistently rising energy prices, wars, environmental degradation, and authoritarian management schema? Again, yes. The American people as a body politic seems to learn best through direct application of pain consequential to prior bad choices in leaders and their policies.
Sometimes, learning requires multiple applications of pain-inducing consequences. Presently, the follow-up pain therapy will be delivered by the continued corrosive incompetence in the presidency of the corporatist John McCain, or it will be delivered in the refreshing alternative economic incompetence of the liberal Barack Obama. Mr. McCain is surrounded by the same failure-prone neo-conservatives and corporate lobbyists that crafted foreign policy and its attendant economic policy necessities under the disastrous presidency of George W. Bush; Mr. Obama is surrounded by fawning yes-men and neo-Keynesian globalists so enamored of "free trade" that they blissfully allowed the Chinese to maintain a peg of the yuan against the dollar so out of line with purchasing power parity that the result was a literal gutting of American industry over the past decade-and-a-half.
Thus, in the event of either McCain or Obama ascending to the throne of Empire, the American people will be the beneficiaries of yet another round of economic, social, and spiritual pain that will progressively and inevitably feel a lot like genuine agony.
The good news is this: although the dosage is pretty much out of their control, the voters are, at the very least, free to choose their preferred delivery system. Whether it be the iron fist of neo-conservative authoritarianism or the velvet choke-hold of its neo-liberalist brother, this time, those who do not like the outcome will have no one at all to blame but themselves.
The Dark Wraith has spoken.
Wrote Peter of Lone Tree:
Wrote Dark Wraith:
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