Today’s high oil prices are no fluke. They have developed because the world’s oil producers can no longer keep up with global demand. Until very recently, Saudi Arabia, which claims to have a quarter of the world’s oil reserves, was able to moderate oil price movements by acting as swing producer – it would increase or reduce production as necessary to ensure that aggregate world production matched demand, thus stabilising prices. Now, however, the Saudis can only act to prevent the oil price falling. They can no longer increase output to stop prices going up because their production is as high as it can ever go. Indeed, its output is already in decline, as the panel below explains.
Most other producers around the world are in a similar position with their output either near its peak or already in decline. Moreover, despite the improvements in technology, 2003 was the first year in recent times that no new major field was discovered. "We're producing three barrels of oil for every one barrel of oil that we find," Michael Rodgers, an oil geologist who is a senior director of PFC Energy, an energy consulting firm in Washington DC1 said in November 2004. As a result, the oil reserves discovered in the heady years between 1950 and 1980 are being run down, as Graph 1 shows.
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As pointed out above, the biggest danger presented by the current oil market is that prices will rise to levels which cause the world economy to go into a recession. Such a recession might well persist for several years because, once investment has stopped, and demand has dropped because all the people who would have been working on the investment projects have lost their jobs, it is very difficult to get the economy working at full capacity again, and very few investments are going to be made while capacity is abundant.
The low level of energy demand in a global recession would, as we have noted, mean that fossil energy would be cheap and there would be no incentive for countries to switch to renewable sources. While the recession continued fossil energy would still be used. This would run down global reserves with the result that, when, eventually, the world economy began to boom again, oil and gas prices would soar at a lower output level than had been achieved before the previous price peak. The new spell of high prices would probaly not last long enough to encourage the development of nonfossil energy sources before they fell back, having caused another recession. This cycle could go on repeating itself for several decades during which the world output of oil and gas steadily declined and no steps were taken to move to other energy sources. Living standards would fall everywhere and there would be increased starvation and misery. The establishment of a fossil energy buyers’ cartel would prevent such a dire scenario being played out.
The peak in global oil and gas production will bring about a dramatic change in the world economy. The challenge is to shape and direct that change so that its effects are positive rather than immensely damaging. The measures which governments and NGOs should be considering must match the scale of that challenge. Our inability to deal so far with three crises mentioned in this paper is rooted in a design flaw in the monetary system and, since a system cannot be made to operate in a way that is inconsistent with its basic design, regulations which merely tinker with that system, or with the economy it creates, will be ineffective. The money system’s design must be changed.
Contraction and Convergence is the best proposal yet tabled to control emissions and hence the use of fossil fuel. The ebcu is essential for Contraction and Convergence to work. And the need to act immediately to ensure that the peak in world oil and gas production does not cause a global depression gives the world a chance to construct the framework that will be required to deal with climate change much sooner than would probably be the case if the process was driven by the threat of climate change alone. Moreover, a global fossil energy buyer’s cartel would give greater stability to the world economy and bring prosperity, particularly to poorer lands. In short, although action involves a major departure from the systems that we know, there is everything to be said for launching the fossil energy buyers’ cartel, changing the money-creation system and adopting C&C now. The crises will only become more acute and much less manageable later on.
High oil prices are causing misery in some of the poorest countries of the world and threaten to collapse the global economy. Yet, oddly, solving this crisis provides an excellent opportunity to establish a framework to cure the climate crisis as well.
Such a cure would involve:
• Adopting the Global Commons Institute’s Contraction and Convergence negotiating framework for ensuring the progressive reduction of global CO2 emissions.
• Determining what tonnage of greenhouse gases it might be possible to emit without causing catastrophic climate change.
• Sharing that tonnage by regularly issuing tradable emissions permits on an equal per capita basis to every individual around the world.
• Launching a new international currency, the ebcu (emissions-backed currency unit) so that the level of international trade adjusts to the maximum amount that can be carried on without causing countries to find that they cannot operate on the amount of energy available to them.
• Establishing a fossil fuel buyers’ cartel to buy all internationally-traded coal, oil and gas at prices which are both stable and fair.
• Changing the basis on which national currencies are created so that the amount of money in circulation is no longer linked with economic growth.
Besides reducing the risk of a runaway global warming and providing stability in the price of fossil fuels, the programme has many other advantages. It:
• Provides an income to the poorest people in the world.
• Enables highly indebted poor countries to pay off what they owe.
• Gives technically-advanced countries a buoyant market for their products.
• Provides business with a predictable trading environment.
• Ensures that the global economy gradually converts itself to one run almost entirely on renewable energy.
• Removes the unfair advantage countries such as the US get from being able to create the money they use to pay for their imports out of nothing.
• Gradually makes the global economy fairer, more stable and more sustainable.
More details of these proposals can be found in the booklet Curing Global Crises, which is available by post from the Feasta office or which can be downloaded from the Feasta website at www.feasta.org/sleepwalking.pdf Curing Global Crises also gives more information about Contraction and Convergence but anyone seriously interested in exploring that approach should go to the GCI website, www.gci.org.uk