This is an important topic, and this website will return to it more fully at a later date. Certainly, the prevailing view within the UK’s DTI is that there are no oil supply difficulties on the horizon, but if there were, it would be best to let the efficiencies of the market resolve them. 1
The question of government intervention, or market forces, breaks into two parts: should the government intervene; and will the government intervene?
The process of oil production involves huge investment outlay. Hence prices would be naturally higher. Moreover, most nations do not have natural oil resources and hence are not self-sufficient. They depend on a limited number of companies/countries which produce oil. When the purchase price itself is higher, government control can be only to a limited extent. You can find here the full related details regarding this.
Historically, at least since the Second World War, whenever energy supplies became difficult, the government felt obliged to act. Whether this was true of the UK Prime Minister during the UK’s ‘Fuel Protests’ in 2000 (after having initially expressed a view that the matter was for the industry to resolve), or the Governor of California during the rolling blackouts, or earlier, the public’s need for energy is so important that when supplies are threatened governments have been driven to act.
Should the government act, is another matter. Companies (‘the Market’) are numerous, in evolutionary competition, and contain tens of thousands of bright, motivated people. Fast and effective solutions come from the market. By contrast, government contains extraordinarily few thinkers (in terms of those who actually influence decisions), is slow, and is dogged by multiple, conflicting, objectives. If you want to solve a cost-based problem that is current, ask the companies to do it.
But the first problem is that, intrinsically, the Market is about production and consumption, not about reduction and saving. Companies make profits by making more goods, or providing more services; they make losses if they sell less. Certainly, given high prices, or adequate legislation, energy supplying and conserving technologies will be efficiently invented and developed. But fundamentally, the drivers of the Market push for doing more with more, not less with less.
An equal difficulty, however, is that companies respond very poorly to problems with time lags. Unless a problem is crystal clear, and almost immediate, effort expended today to resolve the problem is lost profit, weakened market position, and, in the current ridiculous share-price driven economy, makes the far-seeing company a prime take-over target.
(This is not a diatribe from an idle academic; we last heard these views from the most senior UK executive of a European oil major, ranting about the short-sighted stupidity of the City – in whose square mile the conversation took place – that would not let him invest realistically even in exploration, as the loss in this quarter’s bottom line would look too bad to the stock-pickers analysing away in the neighbouring buildings. That this same company, only a few weeks later, gobbled up a large rival, whose bargain share price was the direct result of doing less well in the ‘reserves replacement’ game, told volumes. 2)
Certainly, there is a degree of company expenditure in anticipation of problems, but absolutely nothing on the scale needed to move the economy rapidly away from oil when supply becomes tight. Even the oil companies we speak to spend virtually nothing on looking at future global oil availability. 3
In virtually every case that one can think of, from tobacco, asbestos, pesticides, fluorocarbons, general Health and Safety legislation, to building insulation codes and forthcoming CO2 controls, it is government that has to anticipate future problems, and set the parameters within which companies can efficiently respond. Companies simply cannot risk spending significant money before the signals (whether from price, or legislation) arrive.
And the awfully long time lags associated with changing an economy’s basic energy sources means that if the signals do not come now from a government doing sensible calculations about the hydrocarbon future, that when the signals do arrive, from high prices and shortages, and the efficient companies finally swing into gear, the pain and shocks will be those of the 1970s writ large.
- When the University of Reading was presenting data to the DTI, in the presence of a Shell representative, once Shell had raised the appropriateness of the market for solving any future supply problem, the sigh of relief from the DTI bureaucrats was palpable, and the meeting swung rapidly to a close.
- Of course, intrinsically, it is not the stock-pickers fault either. They must get the best return on their investment funds today if they, too, are not to be out of business or taken over. We have been told of the evils of economic ‘short-termism’ by many very senior people across all aspects of the oil and investment business. It is an issue that needs serious attention.
- ‘Well, we used to look at [global oil supply]; now I think we have one girl back in [a European capital city] who is working on this.’