No good oil on oil

TWO cheers for OPEC. Oil prices fell for about five minutes following news of the production increases, and then shot through US$35 a barrel again when it sank in that they meant little or nothing.

The bulk of the extra 800,000 barrels a day promised is already on its way through the pipeline and simply legitimises quota cheating by some of the 11 OEC nations.

Western governments seem remarkably calm about the energy crunch.

The shock waves from the previous oil shocks of 1974 and 1981 brought hyper inflation and recession to Europe and the US. Stock markets were viciously pummelled in the developed countries.

Memories of those periods appear to have dimmed. It took Washington a long time to realise that another oil crisis was at hand. Politicians did not really begin to squawk until the price barreled well through US$30.

There have been no calls for energy conservation and substitution. Unlike here and Europe, anger among motorists has been muted.

The reason for the complacency is the decade long economic and asset price surge in the US, which has towed much of the world with it. Information and technology industries have driven the growth, rather than energy dependent smokestack factories.

The Economist magazine estimates that the rich economies only use about half as much oil for every dollar of GDP that they did in the early 1970s. Inflation is much lower than it was then, it is argued, and the central banks are smarter.

But we have only had to live with sky-high oil for a year or so.

The real economic effects have not had time to come through. The OECD think tank estimates that each sustained US$10 increase in oil prices clips 0.25 per cent off growth in the west and adds 0.5 per cent to inflation.

What about Asia? It consumes 40 per cent of world oil and has just been getting back on its feet.

The weaker economies of Thailand and the Philippines are already in deep trouble.

Malaysia is an exporter of energy, and so is Indonesian, but that nation is suffering deep structural problems. South Korea is really copping it.

The country imported oil worth US$15 billion last year to feed its blazing economy.

This year’s bill is US$2 billion a month. Japan also imports all its oil.

Taiwan, Hong Kong and Singapore also have problems. China imports about 40 million tons a year of oil and domestic production is not keeping up with GDP.

Australia does not need a setback around the region at this fragile point the dollar and the economy.

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