US and the World Oil Prices

The recent oil price rise comes as a shot in the arm for the US as it continues to allege the growing economies of China and India for the rise in price of oil. Rising to $142 per barrel, the oil price hit the highest level for the previous season. One of the reason for this price rise is Libya's proposed cut in crude oil production as a response to the bill before the US Congress that would empower Washington to sue OPEC members for cutting supplies*.

As I mentioned in a previous post, China & India constitute 9% and 3% of the world oil consumption as against 25% of US. Despite the fact that the growth in these countries is pulling millions out of poverty, US wants these countries to curb their demand. Oil not only gets consumed as a final product, it is also an essential ingredient in many production processes. Thus, higher oil consumption is an inevitable outcome of growth. By asking China and India to curb their demand, we are indirectly asking that they slow their growth. And all this so that we can continue with our high levels of consumption!

I think its high time the government stopped using power to control actions of other nations just because they threaten our comfort zones. Will it really hurt if next time we want to take a vacation, we hop on a Peter Pan or a Greyhound, instead of driving the gas guzzling SUV? Let trade be really free and hence, refrain from using political power to change the terms of trade in our favor.

Its indeed true that OPEC benefits a lot from hoarding supplies. But if we take a step back and think about it a bit harder, then this monopoly may not be all that inefficient. It keeps our already high level of oil consumption from shooting up and in the process allows other growing countries some leeway. It forces us to develop cleaner technologies and thereby reduce our oil dependence. So, in the process of ensuring reserves for their future generations, the OPEC countries may be actually ensuring sustainable development for all countries!

And then if US is indeed able to sue the OPEC countries for cutting oil supplies, it might turn out to be a stab in the back of all future generations.


*See this article from the Financial Times for other possible reasons and related news analysis.