As Matt Simmons points out: oil is not just another commodity. For industrial societies oil is as basic as food and water. That’s why the price of oil cannot go up very high after the production of oil peaks. Economic logic suggests that if demand is high and supply is low then prices will skyrocket. However, there are goods for which the prices cannot be set by the interplay of demand and supply, because if they were it would undermine the viability of the whole economy. Oil is one of these goods.
Many analysts suggest that the price of oil will rise sharply after the peak. They predict that one barrel of oil may cost 280 USD, 350 USD or even 600 USD. Speaking strictly from the economic point of view, this is correct. Demand outstrips the supply, so the price goes up. But… there’s something missing from this picture – that being politics. At the moment world leaders are working hard to restore economic growth. It doesn’t matter if it makes sense or not, that’s just what they intend to do. The price of oil directly underpins the livelihoods of millions of people. What would politicians do if the price of oil started to rise again? Would they react or not? Would they allow their economies to crash again under the high price of oil or would they counteract? And what would people do? Would they march on the streets demanding their governments to act or not?
When analyzing the future of oil supply to my home country, Poland, I looked at it from a social perspective, and I just cannot imagine that prices on the gas stations will go up, up and up. If the fuel prices crossed a certain level, let’s say 5 zlotys per 1 liter of petrol (at current exchange rate that would be USD $1.51 per 1 liter or USD $5.71 per gallon) we would have massive social unrest, road blocks and protesters screaming from the top of their lungs right in front of the prime minister’s office. They would wave the “Solidarity” flags, bang pots and blow sirens until the prime minister’s ears would fall off. People would demand the government reduce the fuel duty in the first place. In Poland taxes are a large chunk of the price of petrol, even 53%. Our government would have to react or it would face defeat in the next elections. That’s the political logic. It seems to me that the same situation would be repeated in other EU countries that have high fuel taxes. In 2008 thousands of truck drivers brought Spain to a standstill as they went on strike over rocketing fuel prices. There were also fishermen protests Netherlands, Portugal, Italy and Belgium, and the famous lorry drivers protests in UK in 2000. And Tony Blair’s government eventually had to give ground.
But what would the US government do if the oil prices reached 147 USD per barrel again? Would Barack Obama react or not? Would he allow more foreclosures, more job losses, more families not able to make ends meet? However, one thing that is different in the US than in Europe, is that there is not much room for lowering fuel taxes.… If Obama wanted to have socially acceptable prices at the gas stations he would have to deal with the price of crude oil itself. And he would have the full support of the EU governments for it, because they don’t want to lose the substantial income from fuel taxes at home.
The record oil prices in 2008 sparked a discussion about curbing market speculation. If the price of oil starts to rise again, politicians may call another G20 meeting so and they can take on this issue. They can take the price of oil out of the hands of hedge funds, investment funds and the others. They can even have a regulated price of crude oil. How could it be since OPEC countries may not be willing to cooperate with the USA or the European Union? Well, they don’t have to. The prices are not set by sellers alone. They can be influenced by buyers as well. If oil buyers agree on a common price, how can sellers get around it? This is just a possible future scenario, but it seems very likely to me.
Keeping oil prices at the relatively low level after the peak may mean that fuel rationing will have to be introduced quickly. When I was a kid we had fuel rationing in Poland. It wasn’t that bad. Actually, it was quite normal. With today’s technology it could be e.g. plastic cards zipped at the gas stations. We can certainly live with it.