Tuesday, October 30, 2007

Oil Politics 2: Oil prices and climate change

The first time I read about world oil prices hitting $100 a barrel or higher was sometime April or May this year. The projection then was that price will be reached sometime in February or March 2008, based on certain assumptions. But the $93/barrel has been touched already over the weekend, and it's not even end-October 2007 yet.

Oil price, like the price of any other commodities and services, is driven mainly by the dynamics of supply and demand. High demand relative to supply means prices will go up. High supply relative to demand means prices will go down. And there are dozens of factors that determine both supply and demand. For instance, when millions of newly-riched Chinese and Indians, plus other people around the world buy new cars, then demand goes up. When oil producing-countries (OPEC or non-OPEC member-countries alike) pump more oil, and no supply disruptions (meaning no oil refinery or oil pipeline is blown up by bombs or knocked down by hurricanes), then supply goes up.

When supply keeps increasing (both petroleum and petroleum-substitutes) and yet demand outpaces the growth of supply -- resulting in higher prices -- then it means one thing: the world (or a big portion of the world) is getting richer. Of course the number of poor people also expands, but the number of people who graduated themselves from poverty has expanded much bigger, and these people have bought new cars, or travelled more often in public transportations, which explains for the big growth in world demand for petroleum products.

Some environmentalists complain though when the world gets richer. Because this means more cars and buses, which means more petroleum consumption and more pollution, which worsens global warming. Thus, higher oil taxes can be a good thing so that oil consumption will be partly discouraged, and governments will have more money to fight global warming -- through more international meetings and conventions? more speeches? more tree planting? more subsidies to wind energy farms? Maybe, I usually do not buy governments' various alibi.

What I know is that when people are richer, they themselves find ways and have the resources to adjust to climate change. For instance, richer people tend to buy houses away from cities, in suburban areas where they are surrounded by trees and gardens. Or they buy idle lands and convert these into new real estate projects that have plenty of trees and open areas for outdoor recreation, entertainment that don't need huge air-con systems that require lots of power that require more power plants.

Should oil prices finally reach $100 a barrel this year and stabilize there, if not rise further, then it should be the right time to campaign for drastic cut, if not abolition, of petroleum taxes. In the Philippines for instance, at least 3 direct taxes are slapped on petroleum products -- import tax, excise tax, and value-added tax. Not included here are taxes slapped on companies that refine, distribute, and sell (wholesale and retail) oil.

Savings by households and motorists from lower pump-price of oil as a result of oil tax cut or oil tax abolition, can be used to buy new cars that are more fuel efficient (those cars that run 15 kms or more per liter). Or buy a new house or condo unit in those high rise buildings in the city center so that they will not travel far from their offices and their kids schools and hence, consume less oil. The options for households are unlimited as each household has unique needs and priorities. The bottomline is that petroleum taxes must come down, if not altogether abolished later, and let the households prioritize how they should spend the fruits of their hard work, especially in determining how they should cope with climate change.

* See also, Oil Politics 1: Bush vs. Chavez? March 12, 2007

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