“A great book which should wake up humankind!” –Klaus Schwab, World Economic Forum
On Thursday, September 7, oil prices on the spot market climbed to $35.39 per barrel, their highest since November 1990, just before the Gulf War. This latest oil price escalation not only threatens a worldwide recession, it also marks another adverse shift in the international terms of trade for the United States, one that will widen further the already huge trade deficit.
On Sunday, OPEC (Organization of Petroleum Exporting Countries) ministers will meet at OPEC headquarters in Vienna to consider a request from oil importing countries to boost daily oil output by at least 500,000 barrels. But it may be too little too late. With the East Asian economies, including that of China, booming again, and with U.S. oil production falling for eight years in a row, even a production increase of 500,000 barrels may not restore lower oil prices.
For the United States, which pays for its oil imports in part with grain exports, this is not good news. Exports of grain and oil are each concentrated in a handful of countries, with grain coming largely from North America and oil mostly from the Middle East. The United States, which dominates grain exports even more than Saudi Arabia does oil, is both the world’s leading grain exporter and its biggest oil importer. Ironically, all 11 members of OPEC are grain importers.
Using the price of wheat as a surrogate for grain prices, shifts in the grain/oil exchange rate can be easily monitored. From 1950 through 1972, both wheat and oil prices were remarkably stable. In 1950, when wheat was priced at $1.89 a bushel and oil at $1.71 a barrel, a bushel of wheat could be exchanged for 1.1 barrels of oil. At any time during this 22-year span, a bushel of wheat could be traded for a barrel of oil on the world market. (See attached table.)
With the 1973 oil price hike, this began to change. By 1979, the year of the second oil price increase, OPEC’s strength had pushed the exchange rate to roughly 4 to 1. By 1982, when the price of oil had climbed past $33 a barrel, the wheat/oil ratio had climbed to 8 to 1. This steep rise in the purchasing power of oil led to one of the greatest international transfers of wealth ever recorded.
Today, 27 years after the first oil price hike, the terms of trade are again shifting in favor of OPEC. With grain prices at their lowest level in two decades and oil prices at the highest level in a decade, the wheat/oil ratio has shifted to an estimated 10 to 1 this year. OPEC has the United States over a barrel once again. With its fast-growing fleet of gas-guzzling SUVs (sport utility vehicles) and falling oil production, the United States is now dependent on imports for a record 57 percent of its oil, making it even more vulnerable to oil price hikes and supply disruptions than it was in 1973.
But this is not the only threat to international security. Climate change from burning oil and other fossil fuels may be an even greater threat to long-term world economic and political stability. Last month’s discovery of open water at the North Pole by an ice breaker cruise ship is only one of many recent indications that human activities are altering the Earth’s climate. The Arctic Ocean ice has thinned by 40 percent in some 35 years. Scientists now believe that summer ice in the Arctic Ocean could disappear entirely within the next 50 years. (See Earth Policy Alert #7)
Greenland’s ice sheet is also starting to melt. If all the ice on this huge island, which is three times the size of Texas and measures 10,000 feet thick (over 3,000 meters) in some places, were eventually to melt, sea level would rise by a staggering 23 feet (7 meters). In addition to ice melting and rising sea level, global climate change can bring more extreme weather events-more intense heat waves, more destructive storms, and more severe flooding.
The world is beginning to move beyond oil and coal toward energy sources that do not disrupt climate. Widely varying growth rates of various sources of energy from 1990-99 give a sense of the energy transition underway. Worldwide, wind power generation grew by 24 percent per year, solar cell production by 17 percent, and geothermal power by 4 percent. By contrast, world oil use expanded at 1 percent a year and coal use actually declined by nearly 1 percent.
Even oil company CEOs are talking about shifting from a carbon-based to a solar/hydrogen-based energy economy. British Petroleum is now the world’s leading manufacturer of solar cells. Shell is pioneering the new hydrogen economy. All the major automobile companies are working on fuel cell engines for which the fuel of choice is hydrogen. The Japanese have developed a photovoltaic roofing material that allows the rooftop to become the power plant for the building.
Denmark now gets 10 percent of its electricity from wind. For Schleswig-Holstein, the northernmost state in Germany, it is 14 percent. For the industrial province of Navarra in Spain, it is 22 percent. We are now getting glimpses of the new energy economy in the solar rooftops in Japan and in the wind turbines scattered across the European countryside.
A nationwide wind resources survey by the U.S. Department of Energy indicates that three states — North Dakota, Kansas and Texas — have enough harnessable wind energy to satisfy national electricity needs. With new wind farms coming online over the last year or two in Minnesota, Iowa, Texas, and Wyoming, U.S. wind-generation jumped by 29 percent in 1999. (See Earth Policy Alert #3)
The generation of electricity from wind is exciting because money spent for this electricity typically stays in the community, whereas money spent for electricity generated by oil may end up in the Middle East. Moreover, with cheap wind-generated electricity, hydrogen, the preferred fuel for fuel cell engines, can be produced during the night when electricity demand is low.
As these examples indicate, the transition to a new energy economy has begun, but it is not moving fast enough. The time has come to restructure the tax system both to reduce the threat of soaring oil prices and to stabilize climate. We can restructure our tax system by lowering the personal and corporate income tax and offsetting it with an increase in a tax on gasoline. OPEC members know that the cost of producing oil in Saudi Arabia, which has the lion’s share of world oil reserves, is roughly $2 a barrel. They also know that if they push the price of oil too high, they will trigger a global recession. This is not in their interest.
If there is a world price for petroleum products beyond which a further rise would be disruptive, then the issue is who gets the difference between the low production cost of oil and this much higher market price. If importing countries push prices of gasoline, fuel oil, jet fuel, and other oil products close to that limit by imposing stiff taxes, then the potential for raising prices by OPEC is lessened. This is why, in a meeting with President Clinton in New York earlier this week, Saudi Crown Prince Abdullah urged importing countries to lower their taxes on gasoline and other oil products.
If we take the initiative and raise gasoline taxes while lowering income taxes, the increase in the gasoline tax will end up in our treasury and individuals will benefit from lower income taxes. But if we don’t restructure and let OPEC countries keep increasing the price of oil, and hence of gasoline, the equivalent of the gasoline tax increase will end up in OPEC treasuries. We will eventually pay the same higher price for gasoline, but not get the income tax reduction.
Copyright © 2000 Earth Policy Institute