High oil prices have upsides. A positive outlook on climate, the future of Porsches and energy policies for Christmas

December 22, 2007

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Climate change and energy were the major topics this year. The grand Mass under spiritual guidance by a Nobel Prize Winner Albert Gore – whose carbon footprint is an inconvenient truth – in Bali did the political feel-good job. Russian, Iranian, Venezuelan, Sudanese and other oil country politics were the feel-bad factor in headlines this year. How will 2008 be in this regard?

Let me start with a provocative statement: the current excessively high oil prices are a good, a very good thing. Not in the short run. Not for our purses certainly. And not even for international stability. Indeed from Russia to Venezuela, including Lybia and Iran, we are likely to witness even more joy riding from autocratic rulers who can afford, at $ 90-100 a barrel, to stick up a middle finger not only to US power, but to their own populations and to regional and international peace….

But what do soaring prices say? Simple: there is more demand than supply. In short, there is scarcity. Economists tend to preach “pricing in” of environmental damage and other negative externalities to combat these. In practice “pricing in” is very difficult – since this involves tax policies that are always controversial and not always effective; or setting prices according to measures that are very difficult to make. How do you set the price of a cubic metre of CO2? In fact, it is this thing called “the market” that sets the price, and this in an indirect manner. Carbon trading schemes are a way of setting a price for CO2 pollution. But where the price shows up naturally, spontaneously, is simply the current oil market: the price of a barrel has never reached the highs we have been witnessing this year. Although it is late, we are finally feeling in our purses the un-sustainability of our practices and the riskiness of Middle East and other politics (futures and other commodity markets are amazing World Affairs commentators).

Our modern economies have an in-built dependency on fossil fuels, and namely oil. The particular fixed nature of these assets makes them particularly prone to capture by autocratic and other governments (see this post for more background). The oil market is therefore particularly instable and risky. The other downside to this dependency is pollution, which is understood as being a cause of climate change. Two major factors play here: electricity generation (via coal for example), and transport (automobiles).

Two questions arise, therefore: are we going to witness the end of our supplies? And will we be able to sustain or lifestyles? Under lifestyle I understand not only rich peoples’ desire and ability to drive a Porsche or Mercedes (Porsches and Mercedes are likely to be most hit by current moves by the European Commission to set carbon reduction targets), but also what Martin Wolf, in his latest column at the FT calls our “positive-sum” world in which for 200 years life for humanity has tended to progressively get better:

A positive-sum economy “is one in which everybody can become better off. It is one in which real incomes per head are able to rise indefinitely.”

Wolf adds: “According to Angus Maddison, the economic historian, humanity’s average real income per head has risen 10-fold since 1820.* Increases have also occurred almost everywhere, albeit to hugely divergent extents: US incomes per head have risen 23-fold and those of Africa merely four-fold. Moreover, huge improvements have happened, despite a more than six-fold increase in the world’s population.”

But improvements have not only been material. The more important progress is called Democracy:

“A zero-sum economy leads, inevitably, to repression at home and plunder abroad. In traditional agrarian societies the surpluses extracted from the vast majority of peasants supported the relatively luxurious lifestyles of military, bureaucratic and noble elites. The only way to increase the prosperity of an entire people was to steal from another one. (…)

Democratic politics became increasingly workable because it was feasible for everybody to become steadily better off. People fight to keep what they have more fiercely than to obtain what they do not have. This is the “endowment effect”. So, in the new positive-sum world, elites were willing to tolerate the enfranchisement of the masses”

Is this the end? Is all this set to collapse because of oil prices, drowned countries, new wars?

Well, everything is possible, nothing impossible. But there are many reasons to believe that this is not likely to happen. Why? Simply because it’s too costly: to start new wars with rogues; too costly to continue driving cars the way we do: the bill at the petrol station will be too high…. And, this year 50% of humanity having become urban: air will become impossible to breathe. Just go to any major city in China, India, South America (and even Eurocratic rue Belliard or de la Loi in Brussels, he he) and one understands what this is all about. People and government will start looking even more for alternatives. After all, it will start being comparatively less costly to do the micro-level changes that matter:

– urban policies that promote the switch from car to efficient public transport [London-style (congestion charge cum improving public transport), Singapore-style even better(impossibly high taxes on cars, fantastic public transport); and fun initiatives like Paris’ “Velib” bicycle policies)];

– energy policies that allow alternative energy providers to flourish (better competition in energy markets, for example, allow more bottom-up initiatives)

– research and R&D policies to find new energy-efficient and/or green technologies (reform universities in Europe, for example), badly needed in order to have to avoid giving in too much to nuclear energy…

– tax policies (penalizing emitters).

It’s hard to implement these policies: too many vested interests involved, car-driver inertia, (also: oversized egos liking Mercedes and Porsches), dominant energy companies supported by nationalistic governments e.g. in Western Europe (Gaz de France, EOn etc.). Now that purse is involved, one can expect the world to end up stinking less and becoming less noisy, after all: both in actual reality and in political terms….So:high live high oil prices! They are the only real incentive to change.

With these words: take a deep breath of fresh air and enjoy Christmas!

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