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Economics Writer Examines Oil’s Shifting Market Position

April 9, 2008 at 6:40 PM EDT
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In the first in a series of NewsHour interviews on oil's standing in the rapidly changing world economy, author Vijay Vaitheeswaran discusses the causes and effects of the recent rise in oil prices and how energy technologies will impact future business practices.
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GWEN IFILL: Now, we bring you the first in a series of conversations looking at the implications of the rising cost of oil. Today, the price of a barrel of oil surged above $112, a new record.

Judy Woodruff has our first conversation.

JUDY WOODRUFF: We’re joined by Vijay Vaitheeswaran, global correspondent for the Economist magazine, who has written extensively about energy and environmental issues. He’s also co-author of “ZOOM: The Global Race to Fuel the Car of the Future.”

Mr. Vaitheeswaran, thank you for being with us.

VIJAY VAITHEESWARAN, The Economist: It’s great to be with you.

JUDY WOODRUFF: Oil has been bouncing around, what, around or over $100 a barrel since late February. Are we now at the beginning of a new era? Or do you define it differently than that?

VIJAY VAITHEESWARAN: Well, I think there are short-term reasons why prices will be high for a bit. But I think it’s a fundamental fallacy, and a popular one, to think that we’re in a world of $100 oil forever.

In fact, I think it’s actually a relatively questionable and risky assumption for two reasons. It’s questionable because there is no real scarcity of oil.

If you look to the Middle East, the Persian Gulf countries, there are vast reserves of oil. The problem is the companies that we’re familiar with — the Exxons, Chevrons, the Western majors — are increasingly being shut out of access to that oil thanks to a wave of resource nationalism taking place in countries of the gulf, in Venezuela, in Russia, where essentially the welcome mat is being pulled out from foreigners.

And so we’re seeing one of a periodic episodes of resource nationalism and that is helping create tightness in the marketplace. The real problem with oil is not scarcity; it’s concentration and, I would argue, carbon, in the sense of global warming gases.

JUDY WOODRUFF: So what does that mean…

VIJAY VAITHEESWARAN: I think those are the real challenges.

JUDY WOODRUFF: Let me, so what does that mean for the price? Are we looking at $100 as far as the eye can see out into the future?

VIJAY VAITHEESWARAN: I would say that this is a commodity product. And we’ve gone through maybe five or six new eras of oil in just the last half-century, and each one where people claim that oil prices will only ever be high for various reasons that seemed sensible at the time.

What happens, as we saw in 1986, 1998, the oil price drops or collapses. The OPEC cartel is an imperfect cartel. The members start bickering. Groups overproduce. We might see, for example, as the world is on the edge of a very difficult economic situation, a possible recession, and demand destruction, substitution by alternative fuels.

The old saying in the energy game is the best cure for high prices is high prices.

Oil too volatile to predict

Vijay Vaitheeswaran
The Economist
Oil is actually a force that tends to stunt democratic development, retrench autocrats. And the very poorest people in places like Nigeria are worse off during periods of high oil prices.

JUDY WOODRUFF: Well, let me ask you about what the implications of this are internationally. Who are the winners in all this?

VIJAY VAITHEESWARAN: I think, in the short term, you have to look at the oil-rich countries, the gulf states, of course, the Saudis, and the remaining Persian Gulf countries, who have two-thirds of the world's remaining reserves of conventional oil.

And, of course, the petro economies of Venezuela, Nigeria and Russia, most famously, they're making enormous amounts of windfall profits. And within those countries, it tends to be a small circle of elites. Often, the leader, Vladimir Putin or Hugo Chavez and the people around them, have grown enormously powerful.

But, unfortunately, this is misleading. In the longer term, what history shows is that this short-term blessing turns out to be what has been defined in the academic literature as the oil curse.

Oil is actually a force that tends to stunt democratic development, retrench autocrats. And the very poorest people in places like Nigeria are worse off during periods of high oil prices and because of the corrupting influence of oil than countries that had no oil at all to begin with.

JUDY WOODRUFF: So the winners can end up being the losers?

VIJAY VAITHEESWARAN: Absolutely.

JUDY WOODRUFF: Bringing it home, do you see a change in how Americans are thinking about oil now that the price is this high?

VIJAY VAITHEESWARAN: There is, and this is another part of, again, the $100 oil forever myth that presents both a challenge today, but also a tremendous opportunity for tomorrow.

The challenge today, there's a huge rush into alternative energy investments, the clean-tech boom, as it's called. And that's all to the good. I think one of the big changes that's happening in America is a real awakening to what I call in my book the great awakening of America to climate change on one hand, as well as the dangers of oil addiction on the other.

So as we move toward dirty fossil fuels, this is a good moment for clean energy technologies. The problem is oil prices will remain volatile.

The Saudis maintain the power occasionally to engineer price collapses. And we've seen what happened after, for example, the '70s oil shocks, when people assumed that prices would only ever be high. They invested in wind and solar and all kinds of alternatives to oil.

It led to tears in the mid-'80s when the prices collapsed. And through the 1990s, the SUV craze took off because people didn't think about oil as a precious commodity.

That's why I say we shouldn't rely on OPEC and the markets to deliver a floor price for oil. We should actually do it through public policy.

And that's why I advocate action at home, whether it's carbon cap-and-trade, as the different presidential candidates propose, or carbon taxes, but that's meaningful and an enduring way to bring about change.

U.S. on the cusp of 'low-carbon'

Vijay Vaitheeswaran
The Economist
I think that the single most important policy change that can happen to do with energy and environment right at the nexus of where oil sits has to do with bringing in a price for emitting greenhouse gases, that is a carbon price.

JUDY WOODRUFF: Well, that's what I wanted to ask you about. What policy do you think the United States should be -- policies do you think the United States should be engaging in, in this high-price environment?

VIJAY VAITHEESWARAN: I think that the single most important policy change that can happen to do with energy and environment right at the nexus of where oil sits has to do with bringing in a price for emitting greenhouse gases, that is a carbon price.

Now, how we do it, there is an academic debate. Do you do it through a carbon tax, as many European countries have done it, or do you do it through something like a cap-and-trade system, capping emissions across the economy?

In the U.S., all three of the leading presidential candidates, most forcefully John McCain, I must say, who has actually proposed specific bills on this, argue for mandatory federal rules and a cap-and-trade system.

So I think, whoever wins, we're going to cross a very bright line into the beginning of a low-carbon economy in America over the next couple of years.

JUDY WOODRUFF: And just quickly, you also talk about ending government subsidies to the oil industry.

VIJAY VAITHEESWARAN: Absolutely. I think the right role for government is in something like carbon policy. Why? Because that's an externality, something outside the market that you don't expect the market to price in, the harm that burning oil does to human health or to global warming or the geopolitical costs, those things government policies should come and do something about.

But picking specific winners, that is, saying this particular oil project deserves a subsidy, that's a classical cronyistic model of government that has typically led us down the wrong path. And I say that for windmills as much as I say for oil developments in Alaska.

We should leave markets and innovators to come up with the specific technologies. And we should allow a level playing field and a thousand flowers to bloom to see what should take us to life after oil.

Replace oil, not automobiles

Vijay Vaitheeswaran
The Economist

JUDY WOODRUFF: And, finally, one question everybody has in the United States and in so many other parts of the world when you talk about the high price of oil, and that is, can I keep my car? What's the future of the automobile?

VIJAY VAITHEESWARAN: Well, it's very popular to revile the SUV as the work of the devil, particularly over in Europe. I argue that, in fact, oil is the problem. The clean car of the future can actually be at the heart of the solution.

When you really look closely at the automobile, it's an engine for mobility, for prosperity, for wealth creation, and individual expression. Most of the problems we associate with the car are actually problems to do with burning of filthy, geopolitically complicated fuel.

And the good news is the technology is being developed in Detroit by some of the car companies, but especially in Silicon Valley and even in China and India for the clean car of the future that will use a variety of fuels. It could be electricity. It could be hydrogen. It could be an advanced biofuel.

Once you change the jalopy, as I call it, the juice will automatically move beyond the one we're using now, which is oil, and we can have the good things that cars provide, while minimizing most of the bad things that we think of associated with cars today.

JUDY WOODRUFF: With a hopeful message for those who love their cars, Vijay Vaitheeswaran, thank you very much for being with us.

VIJAY VAITHEESWARAN: My pleasure.

GWEN IFILL: Our series on the cost of oil continues in the days to come.