Oil crisis hangs over us like black cloud

MANY dismissed the oil spiral as a glitch.

How wrong can you be? Oil is up over $50 dollars per barrel (pb). Anybody who predicted that a few months ago would have been derided.

Not any more. What we are looking at now is regime change.

Oil has gone from $24pb in recent years to more than double that figure today.

Predictions currently suggest we will do well if oil goes back to $35pb over the next 18 months.

What is interesting is that such a projection no longer causes any great disquiet. Partly this is due to the firm belief that the US has extricated itself from economic recession.

It can also be attributed to the belief that the global economic future is bright.

But the brightness on the economic horizon is part of the problem. Not too long ago we consumed over 76 million barrels of oil a day. Today that figure is over 80 and will continue to rise, unless and until we find real alternative energy sources.

Right now that prospect is less than spell binding given the failure of the oil majors and the big vested interests such as US car manufacturers to do anything about the oil guzzling engines they produce.

The world is shifting, however, and the centre of power is beginning to drift back to the former great economic powers of China and India.

Canadian anthropologist Marshall McLuhan wrote in the 70s the world was going Oriental. This was a pointed and economic judgement attempting to point out that Asia was set to exert far greater influence in the globe than had been the case for many centuries.

Part of the manifestation of that shift in power is the rising demand for oil or Black Gold, as it is still sometimes referred to.

Well we all know what the hunt for gold can do. It drove people demented and the more cynical view of the Iraq invasion suggested the US cabinet has been afflicted by this dementia in its search for oil supplies.

Coming back to the world going oriental claim, this oil issue is bigger than Iraq and indeed bigger than all of us in its far reaching implications. This is about growing energy demands and declining oil reserves. It is about terrorism on the one hand and rising living standards on the other.

It has implications for each and every one of us because the dreaded truth is that if the Iraq experience is an indicator of what’s to come, we can expect more invasions and a lot more global instability as oil reserves fall. To be specific: this issue looks set to impact on global economic growth indefinitely. Unless the price of oil starts to come back pretty smartly we are looking at an inflationary spiral hanging over global growth indefinitely.

So far economists have skirted the issue, but the reality will start to impose itself as inflation becomes an issue. Higher inflation will push interest rates higher and wages and then the awful prospect of deflation starts to loom.

It is not the kind of climate that new Finance Minister Brian Cowen necessarily wanted to inherit.

This oil situation has implications for the entire economy and as his first act as the one responsible for the economy should be to cut taxes on all fuels.

He does not need the money at this stage to balance the books and the broader argument of keeping inflation under control has serious merit.

This would be a brave act of leadership in his early days in office and for a man, widely regarded for his brain power, this would be a great act of leadership.

While he is inheriting an economy in pretty good shape, the years ahead may be as testing as anything he ever encountered as Minister for Foreign Affairs.