In a May 26, 2005, article in Asia Times, The real problems with $50 oil, Henry Liu of the New York-based Liu Investment Group provides an economic perspective of high-priced oil.
He describes many complexities of the global oil economy and concludes it is controlled by politics of the dirtiest kind, not by market prices. While OPEC members profit from oil sales, U.S. oil profits from processing, shipping and distributing oil-based products to the global market. Since global oil sales are made in dollars, the United States controls the global oil market.
Liu describes the world as awash with oil and feels wild swings in energy prices damage both oil producers and consumers. Price spikes and their eventual collapse stem from the complex game played by OPEC and the major oil companies. In his view the OPEC cartel serves to deflect criticism from the U.S. oil regime to cartel members.
Liu estimates the current natural price of crude oil at $14/barrel. Todays high oil prices suggest additional North Sea oil could be brought into production over the next five to 10 years. In contrast, if a new field is available, the Saudis could open it in six months, flooding the marketplace with oil, undercutting North Sea production. The lower prices would upset other OPEC members, and Saudi Arabia would gain market share.
Liu believes our economy could adjust to higher prices and perform well. Higher prices stimulate conservation, efficiency and renewable energy, which restructure the economy and lead to permanent reductions in oil consumption. The transition is painful for oil-dependent industries, workers and homeowners. It increases income disparities between oil owners and oil consumers, and leads to economic downturns.
During times of low oil prices, the income of oil-producing nations drops, and they are less able to buy goods and services from oil-consuming nations, producing a global recession. During the past 20 years of low oil prices, conservation efforts were abandoned and our economic growth was built around cheap oil, which increased our vulnerability to supply disruptions and price spikes.
With low oil prices, our government allowed the oil industry to enhance its near monopoly position through consolidation. It also eliminated royalty payments for federal oil leases in the Gulf of Mexico. The industrys profits have exploded with high oil prices. The net effect is to transfer money from oil consumers to global oil capitalists, exacerbating income disparity.
Liu sees a combination of factors leading to global economic troubles. Federal Reserve policies have increased the supply of money at a rate above that of inflation. Since the economy already suffers from too much productive capacity, much of the increased value of oil in the ground has been used for speculation. It fuels more debt, which leads to speculation and corruption.
As consumers spend more income on energy, and their wages fail to keep up with hidden inflation caused by Federal Reserve policies, their standard of living falls and political tensions increase. Liu recommends that oil taxes on consumers should be cut so they have more money to spend while taxes on asset appreciation of oil be increased to end speculation.
He calls for a return to market regulation, and abandoning the crisis intervention approach now practiced by the Federal Reserve. Our widening trade deficit, and the sharp decline in the dollar, cannot be sustained. If high oil prices prolong our debt bubble, the eventual adjustment is likely to be more severe.
Liu offers a different perspective from which to view high energy prices and the need to both curb financial speculation and enhance consumer income to avoid a severe economic downturn. His perception that the world is awash in oil and that consumer spending needs to be stimulated ignores environmental damages caused by fossil fuel consumption. Any effort to sustain the economy must be done in a manner that reduces global warming and enhances ecological sustainability.
From the March 8-14, 2006, issue