PARIS (ResourceInvestor.com) -- If supply and demand were in some kind of balance that just needed leaving alone, we would live in paradise. Unfortunately for neo-classical economists their narrow view of human existence - and the economic theories that emanate from it - fails to take into account people like OPEC, Gordon Brown and the American driver.
It is genuinely hard for some Europeans and the rest of the world to realize just how much Americans need their cars. I say ‘need’ as in the type of ‘need’ a junkie has for his rocks, not ‘need’ as in we need to drink water every six days or we die. The more dependent use of the word.
Some American cities see people who walk about as quite odd, or maybe even frightening. The country has a terrible public transport system and the only long distance method to get about is by plane. American society really is car-dependent and few in America question the right of an American to own and drive as many cars and miles as he or she likes.
Then we have centre-right politicians in the U.K. who see energy as a valuable source of income for the state. Men like Chancellor of the Exchequer, Gordon Brown, Tony Blair’s deputy and the man at the head of the U.K.’s purse strings. He has raised the annual car tax on a new SUV to around $610 (£300). Whether you drive it, or not.
With America paying around $2.57 for a gallon of gasoline - up to $3.20 in San Francisco - the rate in the U.K. is over double that and all of the extra is tax. In fact, Gordon Brown takes more in tax from the oil companies than Hugo Chavez does in Venezuela. And Gordon Brown does not get accused, in the most ridiculous fashion by Steve Forbes this week, of spreading “terrorism” like he accused Chavez.
Because Chavez’s government is also a member of OPEC, a producer country, and not a consumer country like the U.K. or the U.S. And OPEC looks at countries like the U.K., it look at the amount of tax that a country like the U.K. gets from the product it supplies and says “why”? OPEC countries say “why shouldn’t we want high prices?” “Why won’t the OECD nations invest in new refining capacity?”
OPEC’s members look at the American driver, still consuming gasoline, moving the near part of the curve up as inventories are drawn down this week, and asks why should we keep prices low when they still go on consuming? What would you do if you supplied a product that people used more and more, meanwhile some of the same people who bought your product actually made loads of money off it themselves? And they are the ones complaining and calling you terrorists.
And so the supply/demand equation - so beloved by market fundamentalists - fails. It is market disconnect time again.
OPEC sees little justification for pouring more oil onto the market. It is not even really in control of the market any more as we have already discussed. Its members are the ones making huge investments to meet demand and counter the effect of a falling dollar, in which their good are priced. So why not keep prices high? Why cut their own throats?
This week Sheikh Yamani formerly oil minister of Iraq warned OPEC not to overheat the market, saying he thought Venezuela and Iran would quite like $100 per barrel, but undoubtedly any long-term plateau at that price and the world will finally hit a recession and thereby choke off demand.
At the same time inflation is staying stubbornly high, helped by the high energy costs finally knocking through into the economy. And think of all those sub-prime defaulters scaring the heebee jeebees out of the markets. They do not earn much money. It would only take a rise of a few hundred dollars a year in their costs, to push them over the edge. That is what high oil prices do. And if supply and demand worked, we would live in paradise.
