Atlantic Community:Open Think Tank Article "The $100 Barrel is a Blessing"

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January 9, 2008

Gunnar Schmidt, AEG, Silver Contributor (60)

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All arguments make sense to me, if you focus on a long-term perspective. In the short run, however, the economy is suffering, and especially the poorer people who need to commute to work.

January 9, 2008

William L T Schirano, -, Silver Contributor (40)

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I'm in agreement with much of what you have written Professor Straubhaar. I would however caution you against the optimism that you express in point one with regard to U.S. feelings toward more energy and environmentally "conscious" actions. Indeed this is an area where Germans need to understand that our viewpoints continue to remain at the opposite ends of the spectrum.

Despite the recent comments of the Bush Administration, the citizens of the U.S. remain extremely skeptical of international agreements--especially those that purport to tackle global climate change. Setting the bar too high opens up another area where the transatlantic relationship is bound to suffer--especially given those other areas where the U.S. has recently fallen short in the minds of Germans.

Though the U.S. has certainly come a long way (and I say this as a skeptic myself), there is still a ways to go.

January 9, 2008

Niklas Keller, Independent, (8)

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I agree with professor Straubhaar that high oil prices will have a positive effect on consumer behaviour, but he's being very easy on a crucial part of the chain: the major oil companies. Chevron Mobile and Exxon have churned out world-record profits each and every consecutive year since the price of oil began to sky-rocket post America's invasion of Iraq. Alone in 2006, Chevron recorded a 22% increase in profits - 17billion US$.

http://www.youtube.com/watch?v=gLMW1sH85PY

Unfortunately, this money is NOT being re-invested into R&D on renewable energies. In fact, both Chevron and Exxon have continuously offered price moneys for researches able to disprove the findings of the UN's Intergovernmental Panel on Climate Change. Little consolidation then, that 100US$/oil allows for these companies to drill oil fields previously not profitable enough.

One way to go about it is what Hillary Clinton, and other democratic candidates, have proposed:

http://www.youtube.com/watch?v=gLMW1sH85PY

Republicans, apart from a few exceptions, are rather quiet on this issue. Can't blame them though, seeing as over 85% of oil-companies' campaign contributions go the republican party...

January 9, 2008

James Cricks, U.S. Army Command and General Staff College, Silver Contributor (63)

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Professor Straubhaar has offered some great observations about a mixed blessing. His points focus on the economic opportunities for Germany as oil prices adjust to the realities created by increasing demand. He does not mention Russia, Iran, and other nations that also benefit from $100 a barrel oil. Is this reallocation of wealth to them going to help the world in the long term?

Oil has traditionally been a commodity that sells at a cheaper price because we have not found a way to include the full cost of the pollution that it creates. Europe has done a better job than the US by adding high taxes that do lessen the demand somewhat. Maybe at these higher prices, we will be able to unleash many of the new technologies that will begin the transition away from a prehistoric substance to something more in tune with the requirements of our over-populated world. Our advantage so far has been that oil is a luxury for many parts of the globe but globalization is accelerating a greater hunger in India, China, and other developing economies. I agree with Professor Straubhaar that the pain of higher prices may finally force us to consider more uncomfortable solutions.

Our hope must be that the oil price shocks will be gradual enough that the US and other countries can adjust instead of creating panic. An important element of our security policy is ensuring that the US has an uninterrupted energy supply. Until new solutions are found, Europeans must understand that it is not just SUV’s and poorly insulated homes that have created a greater demand in the US. Germany has seven times greater population density than the US making mass transit more attractive in Germany even when oil is at a lower cost. We must work together on solutions while we respect the differences in our national situations.

I would argue higher oil prices are a concern if they are not managed well and new alternative technologies are not quickly implemented. OPEC in the past has worked to ensure price fluctuations are slow but there is now more non-OPEC production and less OPEC reserve capacity to work with. We are reaching an important time and need the leadership to chart new directions. Professor Straubhaar should be applauded for highlighting the positive aspects of what could be a dismal situation.

January 9, 2008

Jens F. Laurson, Center for International Relations, Silver Contributor (27)

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The author is correct about some of the positive effects he describes -- but by accident. He ignores (or misses) the larger picture, however.

The oil price's increase has been steep but subtle enough not to send the global economy into a shock and consequent decline. We can be grateful about that.

We may also appreciate that the oil price's appreciation is - due to the super added 'irrationality cost' - represents a more or linear increase toward eventual cost - which means that long- and medium-term planning about energy is *already* economically sound.

By means of skewed analogy: If the cost of catching Tuna were to go up in direct relation to his increased rarity, then demand for Tuna would be less, less Tuna would be profitable to fish, and Tuna might respond to the decreased harvesting with happy multiplication. Oil, of course, does not multiply, but alternatives suddenly become economically more feasible.

This is what I suppose the author means by points 1 & 2. It's a good and important point to make - and while it does not in any way lead to the conclusion that high oil prices are a blessing, per se, it should remind us that we need not only whine and that in that price is not just a threat to our lifestyle but also great opportunity.

Point 3 is the logical consequence of a high price of oil, it is not in the least novel or surprising nor inherently positive or negative. The only appropriate response to it is "Duh!".

Point 4 is nicely framed in a nationalist-egocentric way, and it's awfully weak. It's also shockingly shortsighted. First: let us deduct from the benefit of greater exports to newly rich countries the price of the economic drag that oil and gas importing countries like Germany suffers. This probably reduces the "benefit" so something close to zero. But even if there were some spare change left to circulate in the German economy

If the author included here the cost associated with the increasingly errant behavior of the emboldened oil states (Russia, Venezuela, Iran et al.) and the threat that these totalitarian countries and their leaders pose to the West (never mind the cost they are posing or will be posing to their own people), he might quickly claim down from his pseudo-controversial claim about $100/barrel being a "blessing".

The title of this little laundry list should be: "$100/barrel not Devastating to World Economy - Opportunities Abound"

A fact observable for several years now. But why not have one's attention drawn to it once again.

January 10, 2008

Andreas Kern, Jean Monnet Centre of Excellence, Silver Contributor (26)

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Professor Straubhaar’s line of argumentation makes sense at first glance. The idea of a rising oil price to entail large long run economic benefits – not only for the German economy - might be correct on the surface. However this is and can only be a long run scenario, which generously drops short run macroeconomic and distributional effects. To put in the words of the two economists Kaminsky and Reinhart, an oil price prevailing at a 100 USD per Barrel follows rather a “long term gain – short run pain” pattern than that of a “blessing”.

However societies will only be able to cope with this “blessing” if new clean and more efficient technologies fall like “manna from heaven”, which is a very strong implicit assumption in Professor Straubhaar’s reasoning. Nevertheless the line of argumentation entails a strong politico- economic implication. Economic reforms - not only in the current discussion - crucially depend on societal preferences and thus political constraints. In this respect Professor Straubhaar is right that prices have a strong impact on consumers’ choices. In this situation rising oil prices create a window of opportunity for policy makers to implement reforms which should have been processed far earlier. In this vein Professor Straubhaar is right that majorities in terms of political votes for economic reforms can be achieved with less political costs in a near-to-crisis situation.

In the end, one point which is really missing in the line of reasoning is how rising oil prices will impact on macroeconomic measures in the short run. In this respect adding rising oil prices to financial market turbulence in the US economy have to be incorporated into the discussion. If the situation and the outlook for the US growth performance and inflation forecasts continue worsening in the next few months, not only Germany’s biggest export market after the European Union member states, but most probably the global economy will face a period of global economic downturn. Whether this shift could be offset by investment booms in resource exporting countries is more than questionable, as these economies rather tend to be capital exporters to the rest of the world. Even if an investment boom occurs in these economies, rising oil prices will add to existing Dutch- disease problems, implying an asymmetric economic development path for emerging resource exporting economies.

In conclusion, adding an optimistic view to the discussion seems to be reasonable and most often missing in the discussion. Nevertheless a situation of rising oil prices is definitively not a blessing, but reality. The question how and whether this ‘reality’ can be turned into a blessing for the global economy however remains still unanswered.

January 13, 2008

Luke A. Nichter, Tarleton State University-Central Texas, Bronze Contributor (12)

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Professor Straubhaar has provided a very different--although thought provoking--take on a problem that has been with us for decades. The problem can ultimately be summarized as increasing global demand for a product with decreasing regional supplies, which has caused increasing irregularities in the market. The $100 question, of course, is how long will the market tolerate such irregularities before structural reforms are forced?

I do not think I would ever describe a situation in which structural reforms are needed as a "blessing", however, from a long term point of view, if such reforms allow the market to operate more efficiently, then one day perhaps in hindsight we will agree that the result of undergoing such difficult structural market reforms was indeed a blessing.

I agree with the core argument of Professor Straubhaar. High oil prices have forced market readjustments, including a more serious search for energy alternatives, and not just the rhetoric related to the need to become less dependent on oil that has existed since the energy crisis of 1973-1974.

The search and ultimate selection of alternative sources of energy also make it more likely that such alternatives, including the technology to deliver them, will originate in the West, i.e. the areas with relatively small oil exports as a percentage of GDP, and more specifically, regions most affected by the recent relative decline of the U.S. dollar, which accounts for a significant portion of the increased price of oil.

At that point, those previously uneasy over energy saving initiatives perceived in the past as overly "green" or otherwise too connected to organized political movements, would have a more palatable--but also dangerously insular--rallying point: a turn toward economic nationalism.

January 14, 2008

Louis G. Schirano, Consultant and Lecturer, (8)

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Dr. Straubhaar's comments are somewhat akin to the director of a drug company clapping with glee as disease overtakes the world. To ignore the very real economic dislocations which are occuring as a result of the price rise; i.e. an impending global economic slow-down led by a possible recession in the U.S.; the exacerbating trade deficit in the U.S. (and the world-wide effect) caused by the steady oil price rise in the face of a weakening dollar; the increasing thuggishness of Russia despite a continuing doleful economy in all other aspects than energy and other global concerns, in favor of increased markets for Germany makes one indeed wonder as to his priorities.

My son, above, also correctly points out that there remains a considerable lack of understanding among Europeans as to American priorities as demonstrated by Dr. Straunhaar's article. Americans like their SUVs--particularly X5s and M350s. Americans tend to believe that they need them; our families are larger (our population is actually growing) our distances are vast, mass transport is not an option for most of this country and the "pack up the car and let's take a trip" is a tradition fully engrained in the American psyche. Sort of like driving at 220 Km/h on your wonderful autobahns in your wonderful German motorcars which does very little I suspect for the conservation of petrol. But I digress.

Dr. Straughaar also seems to ignore that whilst the United States consumes approximately 25% of the world's energy, it also produces roughly 40% of the world's GDP making it one of the most energy efficient states and in the last 15 years its growth in energy efficiency has been the greatest of any nation in the world. Can more be done? Of course, and the price of energy as pointed out has raised a new awareness in concervation and the hunt for alternative energy resources. This is a terrific effect. Most troublesome, however, is a rash of fuzzy thinking especially in regard to petrol resources which has made America's enegry policy a nonsensical rush to create motion which is always confused with progress, ethanol being the prime example, where a "transforming technology" as it has been called actually consumes more energy than it saves if produced from corn as is done here not to mention what it does to commodity prices and the price of beef and the price...well, you get the picture. On a similar note, many of us are rightly concerned over the hysteria over the causes of global warming and the proposed "solutions." On a purely personal note, I am still trying to figure out why Greenland was named Greenland and how grapes grew there 1000 years ago. The internal combustion engine must be a lot older than I thought.

This is, however, a highly stimulating article and has for the most part produced an excellent response save for--I am sorry to say--Herr Keller who's understanding of the oil market, global oil companies and American politics is woefully silly.

January 15, 2008

Andre Kelleners, -, Platinum Contributor (175)

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The article by Prof. Staubhaar - intentionally or unintentionally - does not address the severity of a broad based and unabsorbed rise in input cost. Previous contributors are right in pointing out that the short term impact on growth and development from such a change to the economic equation cannot be emphasized enough. "Short term" may in this case well be a period of several years, or even decades, of challenging conditions for energy intensive industries and the global economy overall. Given the gradual nature of the rise, the impact may be difficult to quantify in a similar way as a very sudden shock would be, but it undoubtedly exits and affects the way companies operate day in and day out.
However the notion that, from a very long-term perspective, such a change in input costs for oil will result in secondary consequences for economic growth and the distribution or re-distribution of its benefits is equally valid, albeit with effects much less pronounced today. The process of creative destruction will get accelerated, fuelling research of alternative forms of energy which will benefit from their newly gained cost advantage – again over time. The creation of such new technologies and processes will positively affect innovation and employment growth in certain industries in the very long-term. From a wealth distribution perspective, this process is likely to initially favor human capital intensive industries (and nations) relative to those heavily relying on energy before the benefits associated with such developments will ultimately trickle down to other parts of the economy and reach less developed countries.
From today's perspective, we are certainly much closer to the adverse effects of the oil price change and the net effect of some of the factors highlighted by contributing authors are adversely affecting economic growth.
When viewed over a time horizon that spans across the next decades, or even a century, and more than the next one, two or few generations, the signs may turn and the jury will be out to determine whether, in hindsight, an acceleration of the inevitable has been a virtue or a vice. The environment should certainly benefit from economic incentives to increase focus.
However, this may not be a condolence to those feeling the economic effects today.

January 17, 2008

Andreas Beckmann, Atlantische Initiative e. V., Editor

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While on a very general level I tend to agree with Prof. Straubhaar's arguments, I see two problems:

The first has been convincingly described by James Cricks: We are witnessing the flow of mind-boggling amounts of capital to countries most of which, execpt from selling their natural ressources, do not really seem to contribute many positive things to the global economy, or to human advancement in general. Some may actually use the capital for some quite harmful activity.

Second, there seems to be a certain contradiction in the analysis: On the one hand, one may consider it a blessing if the high oil price stimulates the search for alternatives as well as efforts towards greater energy efficiency - and thus for positively addressing anthropogenic aspects of climate change. However: I you subscribe to that part of the argument, then why would you consider the increased development of new oil fields a blessing, too?

January 21, 2008

Cosmo Macfarlane, Atlantic Community, Editor

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Louis Schirano's point that the US has a very different situation to that of the EU is completely valid. Indeed, the centralised populations in Europe make "green" mass transport a viable option, while the low population density in the US poses many barriers to such transport systems. Europeans do need to recognise this.

However, Louis Schirano's comment that the US is one of "the most energy efficient states" is debatable. To begin with the US does not produce 40% of global GDP. According to both the IMF and the World Bank this figure lies closer to 27%. Furthermore the EU has both a higher share of world GDP and a lower share of global greenhouse emissions, according to IMF and US Enviromental Protection Agency statistics.

The countries that the US fares well against are mainly NIC's and developing countries. Is this really the comparison that should be drawn? Or perhaps the US should be compared to other developed countries? It may even learn something from Europe.

January 25, 2008

Louis G. Schirano, Consultant and Lecturer, (8)

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I owe a debt to Mr. Macfarlane. His GDP numbers are accurate. I did not make clear that I was speaking of GDP in regard to major industrialized countries or NICs. A serious error on my part and a Jingoistic one: Togo and Macau are of little interest to me.

I further agree that the United States has much to learn from Europe; for a start how did you manage to produce so much electricity through nuclear power? 90% in France, is it not? We have been unable to build a new nuclear plant for 25 years in the face of Green opposition. As the cradle of the Green movement, how did you overcome their objections? Advice on this should be welcomed by all Americans, should it not?

As for Greenhouse gases, the major player is of course CO2 is it not (Nukes again)? Admittedly, I have been and remain a sceptic on the causes of Global Warming, so once again may I ask if there is someone who can explain to me why Greenland was named Greenland 1000 years ago? My fear is we are merrily roaring down a path to salvation of the planet without really understanding whether the route we have chosen is the correct one and spending untold wealth that has better uses; ex. disease prevention. In the end, I think we compair rather well with Europe in those areas that truly matter. In this regard I commend to you the presentation by the representatives of the U.S. at the conference in Bali and the report on the same in the N.Y. Times by Thomas Friedman still available on line. Most enlightening reading and as far as I can discover, unreported in Europe. A shame. Perhaps Europe can learn from us.

Thanks so much for commenting and correcting. The exchange is invigorating.

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