2 June 2008: Remember all the alarming talk about oil going for $100 a barrel? Well, that doesn’t sound so bad any more, does it? By the end of May, the combination of supply constraints, increased demand from emerging markets, and the weakening dollar pushed oil to highs of $135 a barrel.

In response, British truck drivers took to the streets over rising diesel costs, shutting down roads in London. In fact, as the Guardian reported, more truckers had planned to rally in the capital city, but were dissuaded because of the high cost of fuel, which now costs as much as £1.20 a liter ($1.98). On the Continent, French farmers resorted to blocking the oil depots, while fishermen in France, Italy, and Spain protested at Mediterranean ports.

Across the Atlantic, with the election season in full swing, U.S. politicians are making efforts to tackle—or at least making efforts to look like they are tackling—the high energy prices that are hitting consumers’ wallets. With consumer spending accounting for nearly 70% of the country’s gross domestic product, Washington is concerned that high energy prices will trip up U.S. economy, which is already struggling with the fallout from the subprime crisis. There have been suggestions of tax holidays, halting oil purchases for the Strategic Petroleum Reserve, and even Congress approved legislation to sue the Organization of the Petroleum Exporting Countries (OPEC).

Oil companies have garnered the most vitriol. With their spectacular profits, they are easy targets. Yet, even they are struggling with the brave new energy world. One of the biggest problems for western oil companies is that there are fewer and fewer places where they are able to extract oil. Russia has put pressure on BP and Shell to leave the country. Exxon has been shoved out of Venezuela. Iran is off limits, and Iraq, which sits on huge reserves, is too dangerous and its government has so far been unable to reach a consensus about oil contracts. Even in the U.S., oil companies’ exploration opportunities have been limited to offshore waters and Alaska.

By limiting the opportunities of the major energy companies, energy-rich countries are on the front foot. They now control the supply levels, and therefore have a big say over prices. But OPEC was in this position before in the 1970s only to see prices plumb new lows in the 1990s as new sites came on line, filling the market with a glut of oil. Consequently, they are less willing to invest in new exploration. According to the International Energy Agency’s Fatih Birol, “The oil investments required may be much, much higher than what people assume.” Furthermore, any oil fields that are accessible to the likes of Exxon and Chevron are either aging or in hard-to-reach areas, like the Arctic. This means more expertise and expensive tools are required, driving up the costs of exploration.

Under these auspices, the U.S. is taking an interesting step to relieve the pressure on consumers and ease inflationary fears. Treasury Secretary Henry Paulson, on a trip to the Middle East, is expected to invite oil producers and their sovereign wealth funds to invest in the U.S. Such investments have been controversial in the past as Americans are concerned that strategic industries will be bought up by hostile regimes. In 2006, there was a huge uproar over Dubai Ports World's proposed deal to take control of U.S. ports.

Paulson’s idea seems to have some merit, especially as President George W. Bush has been rebuffed on a number of occasions when he has asked the likes of Saudi Arabia to increase production. This new tack will give oil producers a stake in the U.S. economy’s strength.

Importantly, though, this initiative must be seen as an effort to stabilize, rather than lower, prices. It is unlikely that oil producers could earn more money from their U.S. investments than they can by maintaining high prices. What these investments will do, however, is spread the risk and make it in their interest to maintain certain prices. Indeed, the rapidly increasing prices that have hurt businesses have been fueled in part by uncertainty--something that is an anathema to markets.

The best, and indeed only way, to relieve oil prices’ effect in the long run remains changing behaviors. The high prices at the pump are finally forcing consumers to change their ways as fuel consumption fell this past month from a year ago. Indeed, hybrid and electric cars are becoming more commonwhile SUVs are struggling to adapt to the new economies of the road. (This trend is evident in Toyota—the maker of the Prius—vying with GM for the mantle of the largest automaker in the world.)

From a demand perspective, however, both emerging and established economies simply rely too heavily on a fuel that is in too short a supply. Biofuels, wind, and other green technologies do not exist on the scale necessary to replace oil—at least not yet. With no viable alternatives to oil in place, there is only so much that people can do. As Daniel Yergin, author of the authoritative tome, The Prize, notes: “Oil is in the process of losing its almost total domination in ground transport. It is not going to fade away soon—such is the scale of its use and convenience, it will retain a dominant position for many years.”

Therefore, loyal readers, is it best that consumers hope for stable prices? Should we resign ourselves to these high prices at the pump? Or, will the combined efforts of politicians and consumers bring down prices?

As always, send us your thoughts at editors@diplomaticourier.org.