Oil prices shift growth models
Lee Su Shyan
Mon, May 26, 2008
The Straits Times

w much will oil cost in the years ahead? According to the futures market, a lot. Last week, oil for delivery in December 2016 was trading at over US$140 a barrel. It doesn't mean oil will be priced right there when we finally arrive at that date, of course. Only that in comparison with nearer-month contracts, such as the most-active July contract (that's July 2008), which is already trading above US$130, it shows that expectations are for much, much higher prices going into the future. Although current prices must factor in speculation and the declining US dollar, the balance is shifting to the supply-demand gap. Indeed, worries about future supplies - such as the idea of 'peak oil', or that the world has reached or is about to reach the peak of oil production - is increasingly becoming mainstream. Price in this sentiment, and recent levels in oil costs must be seen as a new benchmark range. So it is unlikely that average prices are going to be at US$50, US$70, or even US$90 levels again (barring some calamity that causes massive demand-destruction).

But this isn't all bad news. When people stop thinking of higher oil prices as just a blip, they begin to reorganise their lives accordingly. Oil-guzzling Americans are starting to buy fewer SUVs and trucks, and fuel-efficient sedans are getting a second look. Moreover, oil prices are now at levels that make alternative energy sources more viable, boosting research that will ultimately take them up the efficiency ladder. And with more conservation and more resort to alternatives, oil supplies can stretch longer. What's really bad news, though, is that poorer communities are going to find it much more difficult to adapt. Most alternatives are still costlier than already high-priced oil. In poorer parts of the world, economic growth will slow as a consequence.

Cheap energy was the foundation on which prosperity was built in the 20th century. But the shift from low-cost energy to higher-priced availability is going to transform economic models. New sunrise industries are going to be those that focus on energy conservation and alternative sources. These, however, are going to be centred in the more developed parts of the world. Thus, a way will need to be found to help poorer nations so the lights don't dim on them. This will be the challenge of the next few decades for multilateral organisations such as the World Bank and Asian Development Bank. The market has indicated that the time of cheap energy is well and truly over. Those signals should be heeded quickly if the development gap between rich and poor countries isn't widened further.

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  Oil prices shift growth models

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