, May 26 , 2004
 (STAR) DEMAND AND SUPPLY By Boo Chanco  –  Everyone is so conscious of rising oil prices around here these days. While people say they tend to think twice before hitting the freeways for non essential travel, I am not sure that is really the case. I am also told that SUV sales have started to decline and car buyers are now expected to become more sensible again. But actual visual examination of freeway traffic seems to indicate otherwise.

But one thing is sure. Rising gasoline prices has started to bite. My own son was telling me that when he first came here two and a half years ago, $10 was all it took to fill up the tank of his Honda Civic. Now, he pays closer to $25.

If you believe the news reports on television’s nightly newscasts, you would think drivers are now more conscious of the prices posted by gasoline stations before driving in for a load. Then again, based on the traffic jams I still see on the freeways, maybe most of California’s motorists are still in a state of denial about rising gasoline prices, hoping that prices would go down again soon and everything is just a bad dream.

Well, I think they, and the rest of the world, had better get used to $40 a barrel crude oil. Not only will oil prices not go down to the point when $10 would fill up a Honda Civic, motorists will have to learn to live with higher gasoline prices in the years to come.

Even if the Saudi Arabians have agreed to increase oil production to drive down prices, the positive effect on prices is not likely to be felt soon. And experts doubt if the Saudis can sustain its swing role for the medium to long term. Other OPEC members have technical reasons that prevent increased production.

I know it is not a popular thing to say, but in a sense, rising oil prices may prove to be a blessing for the world. Sure, there would be some negative repercussions on the world economy in the short term, but higher oil prices will make it economically viable for alternative energy resources to gain wider acceptance. People will also learn to use petroleum resources more productively. We are after all, dealing with a fast declining natural resource.

I find it scandalous that a liter of Evian mineral water costs more than a liter of gasoline in many places in the world. People seem to be taking the continued availability of petroleum resources for granted, as if the world never experienced an energy crisis barely 25 years ago. Yet, this attitude towards petroleum as a natural resource is a serious miscalculation. We may end up being sorry for our current profligate ways in the foreseeable future.

Today, oil traders estimate that maybe $10 out of the $40 being quoted for a barrel of oil is what we can call, the terrorism premium. This premium represents the anxiety of petroleum traders over the possibility that terrorism could disrupt the flow of oil from Saudi Arabia, a key source of the world’s supply. The jitters arising from the series of terrorist attacks on foreigners in Saudi Arabia have resulted in the recent spiraling of prices.

Knowledgeable industry sources however say that even without the threat of terrorism, the ability of Saudi Arabia to supply a large part of the world’s crude oil requirements will become increasingly limited. There are industry experts who say that we are on the verge of seeing a collapse of as much as 40 percent of Saudi Arabia’s production in the next three to five years. Simply put, Saudi Arabia’s oil fields are maturing. Not only will oil production in these maturing fields start declining, producing oil from them will cost more.

There are, however, those who sneer at calls for shift to a less hydrocarbon oriented lifestyle. They point out that there are still large untapped reserves of petroleum in the world. While that may be true, they forget that the cost of extracting these resources are a lot higher and can only be supported by higher prices for the consumers. The deep water natural gas resource we are exploiting at Malampaya is a good example of this kind of fairly expensive resource to bring to market.

This is why only by allowing the market to work can we be relatively assured of continued supply of energy, petroleum or its alternatives. For now, we also need the market to discipline the world’s seemingly unquenchable thirst for oil. The last time this happened, governments and entrepreneurs worked together to encourage, if not mandate, more innovative and efficient ways of using energy. When oil prices started going down towards the $10 a barrel range, people forgot the need to use this fast depleting resource wisely.

The unfortunate thing today about this development is the way politicians are misusing the market signals for increasing efficiency. Much as I think George Bush should be replaced by John Kerry this November for other major reasons, the President is right to reject the demand of Kerry and the other Democrats to use the strategic petroleum reserve to help bring down prices now. That’s an ill-considered, politically motivated proposal that Bush correctly observed, exposes America even more to the dangers of a real emergency in the future.

John Kerry is desperately playing politics on this issue and dangerously too. At most, maybe as a token measure, the Americans should stop buying oil for delivery to their strategic reserve in the meantime and relieve some of the pressure driving up crude oil prices. But given the limited and easily calculable actual stockpile, tapping the reserves in an attempt to drive down market prices is a dubious proposition at best.

Strategic oil reserves of the industrial countries are said to be good for just a little more than a hundred days, just something to help them in case of an abrupt supply interruption arising from accidents or terrorism in the producing countries. As such, the impact on prices is expected to be negligible. Using oil from the reserves now will also distort market conditions by giving ordinary consumers a false sense of security about the continued long term availability of petroleum at its accustomed price.

For us in the Philippines, reserves are irrelevant. I remember that during the oil crisis years, we used to maintain over a hundred days of reserves. Today, our oil industry lives from hand to mouth, with barely 30 days. And we can’t blame them because keeping reserves costs money and we are not ready to pay for such costs. We are not even ready to pay for the costs of the product with consumer groups acting as if we all have a natural right to gasoline or diesel at the price we want to pay.

This is why from a world perspective, there are those who are saying "thank heavens for rising oil prices." It is a bitter medicine we should take now that our backs are not yet against the wall. It is a bitter medicine we need to take anyway as a consequence of the all too predictable depletion of this natural resource in our future. We need to dust off our energy conservation programs and the energy policies that worked for us during the last crisis.

Hopefully, enough of us, consumers, industry and government, take the signs seriously and do something to help us delay the inevitable or at least, make the transition to a non-oil energy scenario somewhat less disruptive.


Here’s a classic from EG Hizon.

Five surgeons are discussing who makes the best patients to operate on.

The first surgeon says, "I like to see accountants on my operating table because when you open them up, everything inside is numbered."

The second responds, "Yeah, but you should try electricians! Everything inside them is color coded."

The third surgeon says, "No, I really think librarians are the best; everything inside them is in alphabetical order."

The fourth surgeon chimes in, "You know, I like construction workers. Those guys always understand when you have a few parts left over at the end, and when the job takes longer than you said it would."

But the fifth surgeon shut them all up when he observed: "You’re all wrong. Politicians are the easiest to operate on. There’s no guts, no heart, no balls, no brains and no spine, and the head and the ass are interchangeable.

(Boo Chanco’s e-mail address is

Reported by: Sol Jose Vanzi

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