Recently, I wrote about the devastating – and largely unreported – impact that resource scarcity is having on Pakistan’s fragile economy and society. Barely a day goes by without a new data point that illustrates the size of the problem.
Today, for example, the papers report that the two main political parties (the ruling PPP, and its arch opponents, PML-N) have come together to try and fix an economic crisis that they admit has its main roots back in the 2008 resource price spike:
Sources said the government had told almost all parties that most of the economic pressure had built up because of carryover of huge fiscal deficit from the previous government which did not pass on energy prices to consumers even when international oil prices increased from $90 to $147 a barrel and the current government was facing a similar situation. Most public sector corporations have since been bleeding mainly because of this single factor.
Power companies are getting so desperate for fuel oil (which they are using to replace gas, whose shortage has led to an electricity crisis), that they’re signing sovereign-backed contracts for imports on deferred payments, going against the express wishes of the state-run Pakistan Oil Company, and, seemingly, without explicit permission from the government.
In Punjab, meanwhile, grain markets are grinding to a halt, as the government attempts to tax agricultural production in order to plug its yawning fiscal hole and – I suspect – to make it politically easier to raises taxes on urban consumption. Traders are on strike, accusing the government of destroying the ‘backbone’ of the economy.
The impact on ordinary people is marked. The gas shortage is pushing urban residents back towards a reliance on biofuel. “I am purchasing stove to use firewood in the 21st century thanks to the government,” complains one resident of Rawalpindi.
Fortunately, food shortages are yet to hit one of the citizens of nearby Islamabad: President Zardari. He has his own camel in the Presidential Palace, because he thinks the milk is healthier.
The President House also has a herd of black goats. One goat is slaughtered everyday when Mr Zardari is there.
Earlier, his trusted personal servant, Bai Khan, used to buy a goat from Saidpur village every day, but now a herd has been kept in the presidency to avoid frequent visits to the animal market. The animal is touched by Mr Zardari before it is sent to his private house in F-8/2 for slaughtering.
Good to see one man, at least, taking resilience seriously.
Back in 2008, just as the oil price started to plummet after hitting its all-time high of $147 a barrel, I did a post pondering whether the drop was “the start of a long decline, or just a brief pause to draw breath before a resumption of the relentless upward march of recent years”. I argued that oil prices would stay low as long as the credit crunch lasted, but that
once we’re through the crunch, we may be back to a game of cat and mouse between oil supply and economic growth. Demand falls, oil price falls; demand picks up, oil price goes back up too – but never for long enough to give investors a clear signal to pump cash into new oil supply infrastructure
Over at the Energy Bulletin, Dave Cohen’s just published a post thinking about the same question – and wondering when the next oil spike is due. His take is that the next crunch will likely be in 2013, give or take a year, as his graph below illustrates:
As Dave notes, this graph is not a forecast on oil prices, but rather a schematic illustrating that a) demand surges cause oil price shocks [i.e. the peaks on his graph]; b) oil price shocks cause recesssions and force reductions in demand [the troughs]; and c) the average price of oil goes up over time [the straight line]. Informally, he notes, “we can say there’s been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months”.
His whole post is worth reading (n.b. especially his emphasis on the key variable in all this, namely prospects for Chinese growth) – and leaves the reader wondering: how do we break out of the cycle?
As I argued back in 08, one answer could be massive new investment in oil production – remember the IEA’s consistent warnings throughout the downturn about how under-investment in new oil production is setting the stage for a new supply crunch. But there are two problems with that option. One: we’re into diminishing returns territory. With the age of easy oil over, production increases from now depend on unpalatable options like tar sands, oil shales and, ahem, a lot more deepwater drilling (which is projected to account for 40% of global oil demand by 2020). Two: this approach does nothing to solve climate change.
So, I concluded 2 years ago, “it looks like the only way through is for policymakers to agree a global climate policy framework that’s both global in scope and sufficiently long term to provide investors with an unequivocal signal of where to put their cash: this is the only way of squaring energy security with climate change”.
I still think that’s right – but obviously, prospects for that have dimmed considerably since Copenhagen. So where does that leave us? That leaves us, alas, stuck in the yo-yo world depicted in Dave’s graph (which looks a lot like the Multilateral Zombie climate policy scenario that David and I described in our 2009 report for the UK government on global climate architecture – see page 7 onwards).
Oh – and it also leaves us on track for 3 degrees plus of global warming.