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NEWS FROM THE WORLDWATCH INSTITUTE
From the Office of the Chairman
Worldwatch Issue Alert
Alert 2000 - 8
For Immediate Release
September 8, 2000
OPEC HAS WORLD OVER A BARREL AGAIN
Lester R. Brown
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 Oil Producing and 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 Worldwatch Issue Alert #7,
http://www.worldwatch.org/chairman/issue/000829.html
)
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 Worldwatch
Issue Alert #3
http://www.worldwatch.org/chairman/issue/000607.html
)
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: Worldwatch Institute 2000
CONTACT INFORMATION FOR JOURNALISTS:
Lester R. Brown,
Chairman: (office: 202.452.1999)
(home: 202.328.6256) Email:
lesterbrown@worldwatch.org
Reah Janise Kauffman, Chairman's Office:
(office: 202.452.1999) (home: 703.237.4160) Email:
rjkauffman@worldwatch.org
FAX: (202) 296-7365
FOR ADDITIONAL INFORMATION AND DATA:
WWW.WORLDWATCH.ORG/ALERTS/INDEXIA.HTML
Table: The Wheat/Oil Exchange Rate, 1950-2000
Year Bushel of Wheat Barrel of
Oil Bushels/Barrel
(U.S.
dollars) (ratio)
1950
1.89
1.71 1
1955
1.81
1.93 1
1960
1.58
1.50 1
1965
1.62
1.33 1
1970
1.49
1.30 1
1971
1.68
1.65 1
1972
1.90
1.90 1
1973
3.81
2.70 1
1974
4.89
9.76 2
1975
4.06
10.72 3
1976
3.62
11.51 3
1977
2.81
12.40 4
1978
3.48
12.70 4
1979
4.36
17.26 4
1980
4.70
28.67 6
1981
4.76
32.50 7
1982
4.36
33.47 8
1983
4.28
29.31 7
1984
4.15
28.25 7
1985
3.70
26.98 7
1986
3.13
13.82 4
1987
3.07
17.79 6
1988
3.95
14.15 4
1989
4.61
17.19 4
1990
3.69
22.05 6
1991
3.50
18.30 5
1992
4.11
18.22 4
1993
3.82
16.13 4
1994
4.08
15.47 4
1995
4.82
17.20 4
1996
5.64
20.37 4
1997
4.35
19.27 4
1998
3.43
13.07 4
1999
3.05
17.98 6
2000
(est.) 2.94
29.34 10
SOURCE: International Monetary Fund, International Financial
Statistics, various
years. Compiled by Worldwatch Institute.
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