Why is petrol so expensive?

Prime Minister John Howard has called for an all-out debate on energy in Australia. But what he doesn’t want is an all-out debate on petrol prices - because that’s a debate that he can’t win.

So far, for reasons best known to themselves, the Labor Party has given Howard an easy run on petrol prices. Perhaps they assume rising fuel prices reflect international pressures over which the Howard Government has little control.

But how true is that assumption? It’s true that oil prices are largely set at an international level. The rising cost of petrol at the pump in Australia reflects the rise in the price of crude oil on NYMEX, where the futures contract for “light sweet crude” has gone up from about $20 a barrel at the end of 2001 to just over $75 a barrel today.

NYMEX light sweet crude futures index

And who is to blame for these rising world oil prices?

Not us, cries the White House. The Bush team prefers to blame rising demand for oil by the developing powerhouses, China and India, which are depicted as pressuring supplies and driving up prices.

The problem with this assertion, as Nobel Laureate Joseph Stiglitz argues in a recent study on the costs of the Iraq war, is that the demand from China and India has been rising steadily for years without any corresponding impact on oil prices, and certainly precedes the recent tripling in the price of oil.

Is it due to the peaking of oil supplies? There is no doubt that the arrival of a peak in world oil supplies will have an upward effect on world oil prices in the medium-term. Existing oil fields are reaching their peak, while known and future sources of oil will be far more costly to access, and discovery of new fields is fast declining - as dealt with admirably by the ABC’s Four Corners program in July.

Important as it is for debates over future energy supplies, “peak oil” cannot be blamed for the recent tripling in prices. More likely, the peaking of oil supplies will have an effect on prices in conjunction with sudden crises like Hurricane Katrina, which destroyed 109 oil platforms in the Gulf of Texas (according to US Government official figures).

So what is driving high oil prices internationally? Among the various contenders, one factor is inescapable: the Iraq War. Before the war, Iraq was pumping around 2.5 million barrels of oil per day. Since the war started in 2001, its record is as shown in the chart below.

Before the war, US Vice President Dick Cheney predicted that Iraq’s oil output would return to 3 million barrels per day by the end of 2003. It never made it back to pre-war levels, and in January 2006 it was down to 1 million barrels per day, with constant attacks on pipelines and oil installations by the Iraqi resistance.

A loss of 1 to 2 million barrels per day has not been made up by other oil-producing countries. OPEC is at full stretch, while producers such as Indonesia are falling behind in their race to remain oil independent. This is where the effect of peaking oil supplies may be felt - in the inability of OPEC countries to ramp up their oil supplies in the face of rising prices.

The impact of Iraq’s losses in output will be felt for some time to come. Ultimately market prices reflect expectations as to future events. And the invasion of Iraq, and its aftermath in Iraq itself and in the wider Middle East in general, have made for the most negative market expectations - despite the doubling in Iraqi oil production between January and May this year.

So the makers of the decision to invade Iraq and establish a “democratic regime” - to which John Howard made Australia a party as a member of the “Coalition of the Willing” - cannot escape the consequences of their actions. Apart from the debated aspects of this Iraq adventure, such as an increased risk of terrorist attacks (rather than their containment), there is one unambiguous and incontrovertible fact about the Iraq War - and that is the reduction in oil output that has led to rising oil prices.

So whatever the reasons for the invasion of Iraq - whether it was concern over weapons of mass destruction, or whether it was the much more likely concern that the US needed an oil-rich client state in the Gulf - it is the results of the invasion that can and should be argued about now.

This is the weak point in the Howard Government’s position, and precisely where one would expect a functioning Opposition to be focusing. And as well as targeting Howard for his role in pushing up petrol prices, through his willing involvement in the Iraqi adventure, a functioning Opposition would be leading the way to a sane alternative to oil-dependence, by backing renewable energy sources critical to Australia’s long-term security. (Yes, the ALP has an official platform commitment to renewable energies - but where is this heard in current political debates?)

Petrol prices are the point of vulnerability because Howard cannot promise to make them lower without making drastic commitments to alternative fuels that are cheaper (such as ethanol) and to strategic preparations for permanent shortages associated with the peaking of supplies, both worldwide and in Australia. If he did this he would expose his promises of cheap petrol as hollow. To engage in a debate over the causes of high oil prices would simply lead back to the Iraqi stalemate. Here Howard is trapped in a dilemma of his own making.