Do you want the good news or the good news about the surge in the oil price? All right, we will come to that in a moment.
First we all have to acknowledge that, in the short term, seeing oil rise above $130 a barrel is deeply disturbing. During the 1970s and early 1980s two oil shocks, the first in 1973-74 and the second in 1979, provoked two global recessions. The world is already heading into some sort of downturn and this will inevitably push things down a bit further.
It also certainly squeezes living standards. Extra money spent at the pumps is money that cannot be spent on other things; there is the indirect effect that higher energy costs put up the price of everything, from food to foreign travel.
There is a further issue. Higher inflation makes it harder for central banks to offset the incipient recession by cutting interest rates. In the past three weeks, there has been a sharp about-turn in expectations for UK rates, provoked by the deterioration in the Bank of England's inflation projections. Hardly anyone expects more than a token cut in rates this year and it is even plausible that the next move may be up, not down. In Europe there has been a similar switch in mood, with the serious possibility that rates may move up later this year. In the US it is now accepted that the Federal Reserve made an error in cutting rates so sharply in response to the banking crisis; the next move will almost certainly be up.
So why should there be any good news about oil? I would cite two broad areas where we can be, if not totally cheerful, at least able to recognise that there are strong positive factors associated with more expensive oil. One is that the world is much better placed to cope with this oil shock than previous ones. The other is that we need more expensive oil to force us to conserve energy, for economic and environmental reasons.
We are better placed than in the 1970s partly because the global trend in inflation has until recently been down. We have had a property bubble in most countries, and that is now deflating. But the rise in current inflation has been under reasonable control. It was the other way round in the 1970s, when the rise in the oil price was in response to other price increases.
We are also more efficient in the sense we use less energy, and less oil, to produce a unit of output. In present-day money, the peak price of oil in 1979 was around $90 a barrel, so the price is indeed higher now. But expressed as a proportion of global GDP being spent on oil, the proportion is lower, about 6 per cent as opposed to 7 per cent. The world economy has grown, so we are using more of the stuff, and that creates a huge issue for the future. But a typical developed country uses half to one-third less energy for each unit of GDP than it did in the early 1970s.
Yet another reason to suspect that this downturn, seen globally, will not be as serious as those of the 1970s and early 1980s is the rise of the Brics – Brazil, Russia, India and China. It is a point that has been often made but though there may be some slowing of growth in these countries, there is every chance this will be quite slight. So China slows next year from around 12 per cent annual growth to, say, 9 per cent. It would still be adding more demand to the world economy than either the US or the eurozone, possibly more than them both combined.
But of course rapid growth in the Brics maintains strong demand for oil. In past cycles, the price fell back because demand for oil from the developed world slackened and also because new discoveries, such as the North Sea during the 1980s, came on stream. This time it is different. Demand is likely to remain strong and there are no obvious new sources. Tar sands in Can-ada? Sure, but that is expensive and environmentally difficult to extract. Biofuels? Can be done, indeed is being done, but to turn US corn into ethanol has the obvious effect of reducing the amount of corn available for food. The world price of most grain crops mercifully seems to have topped out. But corn, or maize, remains very high.
As for trying to beat up Opec, as our Prime Minister seems to want to do, that makes no sense at all. True, Opec produces 40 per cent of world output, but all members bar one are producing about as much as they can. Only Saudi Arabia seems to have any spare capacity and even that is in doubt. It might have difficulty increasing output even if it wanted to.
That leads to the fundamental point: there is a finite amount of oil in the world. The International Energy Agency has just cut its estimates for global reserves and that may or may not be right. What is certain is that it would be impossible for China and India to follow the growth path they would like to achieve by relying on the same energy-heavy technologies as the West.
The most energy-efficient G7 economy in the world, in total energy use per unit of GDP, is Japan. If China and India sought to move towards a Japanese-style economy, rather than a US-style one, then the world might manage to scramble through, and fast-growing emerging economies continue to lift the standard of living of their people.
But it will be the small actions by everyone – individuals, companies, governments – that will make the difference. The way to keep up that pressure will be the price mechanism. I still think the present oil price is becoming a bubble and will eventually fall back, just as commodity prices are topping out. But do not expect a radical fall as in the 1980s and 1990s. That is good news for the planet.
One final thought. During this present squeeze, the UK is in a better position than any other G7 country, bar Canada. The North Sea is in decline but we are only just net importers of oil, as the other graph shows. So when ministers claim that this situation has been created by global forces far beyond their control, they are only half right. In relative terms, as an economy we do rather well. In revenue terms, thanks to oil taxation, the Treasury does rather well. In fact, the oil price is helping shore up otherwise dreadful public finances. Let's not forget that too.
The World Bank at last admits: one size won't fit all
So can the developing world continue its economic growth spurt as oil – along with other commodities – comes under increasing pressure? If India and China were to reach US levels of oil consumption, they would together use double the world's present total output. So does this mean that developing countries have to find another path towards higher living standards?
It is a huge question and one at the heart of a new study, 'The Growth Report: strategies for sustained growth and inclusive development', published by the World Bank last week. It is led by Professor Michael Spence, the Nobel laureate at Stanford University, and brings together a group of economists and policy experts from around the world. These include another Nobel prize-winner, Professor Robert Solow of the Massachusetts Institute of Technology; Zhou Xiaochuan, governor of the People's Bank of China; Trevor Manuel, finance minister of South Africa; and Lord Browne, former chief executive of BP. So all the elephants are in the ring. Do they dance?
Well, judge for yourself and start with two quotes. One is the report's key message: "Fast, sustained growth is not a miracle. Developing countries need to know the levels of incentives and public investments needed for private investment to take off in a manner that leads to the long-term diversification of the economy and integration into the global economy."
The other is from Professor Solow, who puts it this way: "The evidence in our work pointed to a number of findings: that competition is essential at every stage of economic development; that access to world markets is very much a lesson for the rich countries as it is for developing countries; and that the more equitable the growth, the more sustainable it's likely to be."
It is hard to quarrel with either of those propositions. One of the central points of the report is that there is no one-size-fits-all set of solutions, something the World Bank has been accused of promoting. So it looks at the very different issues facing four different groups: African countries, small states, resource-rich countries, and middle-income countries where growth has stalled. All need good governance but the detail is different in each case.
At best, the report will have two effects: to encourage examination around the world of what different countries need to improve their performance; and to encourage a rethink of the work of the World Bank. At worst? Well, this report does no harm, which is more than can be said of many policies from rich countries, as well as poor.Reuse content