The Oil Crunch

In terms of economic theory, the oil market is an exemplary one. Prices are determined by supply and demand. China fuels its growth with oil, the US fuels its cars, and the central heating season has just got started in the northern hemisphere, also fuelled with oil.

But it's looking less lively on the supply side, due to various geo-political turmoil, American and Iranian saber-rattling, as well as technical difficulties in increasing the capacity of refineries. With OPEC inflexible about raising production quotas, only Saudi Arabia is in a position briefly to increase daily quotas -- but is repeatedly thwarted by the other member states at OPEC conferences.

And that's not forgetting the speculators who have been pushing up prices in recent weeks. It's a self-fulfilling prophecy: the prices rise because everyone expects them to -- and the gamblers on the futures market react accordingly. Thanks to the property crisis, bank shares have lost their appeal for hedge funds, while the money keeps pouring into oil contracts. In short: high demand and short supply mean rising prices. Economics can be that simple. What's more complex is the question as to how this oil price shock affects the world economy. Perhaps not as much as many fear, especially in Europe. That's largely because the dollar is doing so much worse than the euro, which means the Europeans are not feeling the pinch of oil costs quite so acutely. In the US, meanwhile, the financial crisis and falling consumer confidence might well spell a recession.

Here in Europe, we're less affected by prices at the pump for other reasons. We've learnt how to deal with rocketing oil costs, and the chemical industry, metal working and energy-intensive industries have all rapidly boosted their energy efficiency. We require only half the energy we needed 20 years ago for the same amount of growth. Moreover, we are seeing growth in the banking sector, information technology and service industries -- all areas which depend on relatively little oil.

Globally, oil has become a less crucial production factor than it was two decades ago, which is why life would no longer need to come to a grinding halt were a barrel to cost $150.

Ultimately, this is not so much a crisis as an opportunity. The higher the cost of oil, the more interesting the alternatives -- including those previously dismissed as economically non-viable because they were always measured against the relatively low cost of oil.

Today, scientists are fleshing out scenarios for the post-oil era, researching renewable sources such as the sun, water, wind, geothermal and biomass energy.

We have long since realized that our finite energy sources are too valuable to use them to heat our badly-insulated homes, to drive the car to the mailbox or to criss-cross the planet on cheap flights. Every time the price skyrockets, the effect is therapeutic. It forces industry to be economical on its use of energy; it forces consumers to look into saving heating costs and driving less gas-guzzling cars -- and it forces energy providers to invest in alternative energy sources.

The more expensive oil becomes, the more worthwhile it is to pin our hopes on investments that reduce our dependency on oil. If you look at it like this, then let those prices climb -- the higher the better.

Rolf Wenkel is a business editor for DW-RADIO (jp)