5 May 2008
editorial
Johannesburg — THE pump price of diesel will exceed R10/l for the first time when fuel prices are adjusted on Wednesday, and petrol is not far behind.
This follows a doubling of the dollar price of crude oil over the past year or so, to a peak of almost $120 a barrel last week, and the sharp weakening of the rand against the dollar during the first few months of the year.
The currency has rebounded in recent weeks and oil came off its record high as concerns over global supplies eased, but few market watchers would be surprised if the trend is reversed as quickly as it was established. The easing of oil prices over the past few days was ascribed by analysts to expectations that the US Federal Reserve would cut interest rates, thereby supporting the dollar and reducing the oil market's attraction as a hedge against inflation. But the prospects for the US economy remain bleak in the longer term, so if it is the dollar that is driving oil prices there is every likelihood that they will resume their upward march before long.
Chakib Khelil, president of oil cartel Opec , warned last week that crude could hit $200 a barrel soon if geopolitical tensions and market speculation continue. There was a time when Opec could have been blamed for high oil prices, and such criticism would have been justified. But currently it is all the major oil producing countries can do to keep up with global demand, so Opec's ability to control prices by cutting production has diminished.
Deutsche Bank has warned in a report that there is a "huge risk" that oil supply constraints and a lack of alternatives will cause crude prices to continue rising until demand collapses. It is no secret that the world economy is heavily dependent on oil and demand is therefore relatively inelastic, so it is anybody's guess when that collapse might come. Deutsche suggests $250 a barrel, based on the 1970s oil price shock and subsequent market collapse .
The economic consequences would be devastating if history was indeed to repeat itself more than 30 years later, and no country would be spared. However, there are significant differences between then and now that make a market collapse by no means certain. In the '70s there were neither viable alternatives to oil nor the technologies to produce them. Today those technologies not only exist but are being actively developed, not least by the multinational oil companies themselves.
In the meantime there is tremendous scope for global oil demand to be curbed simply by improving the fuel economy of cars, for instance. In addition, companies such as Sasol are forging ahead in the production of synthetic fuel from coal, and the oil majors are putting an increasing proportion of their considerable resources into research that could see bitumen and even chicken fat becoming fuels of the future.
Advances in solar, nuclear and other sustainable electricity generation technologies, as well as more efficient batteries, herald a new era of transport powered by electric or hybrid motors, and hydrogen as a fuel promises the added benefit of zero emissions.
Biofuels have been getting a bad press recently due to perceptions that the diversion of crops such as maize to fuel production is causing runaway food price inflation. However, cutting biofuel production could be counterproductive -- the resulting higher oil prices would make food inflation worse by pushing up the cost of both fertiliser and transport.
It seems higher food prices are part of the price the world must pay to avoid the economic Armageddon that could be our fate if a bridge is not found between oil and the fuels of the future.
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