US oil demand encourages alternatives

The irony is delicious. George W. Bush as the reason the world successfully responds to climate change. Que? It gets weirder. He may also be the reason the US car industry declines into irrelevancy and there's a boom in alternative energy.

Think about it. If, as Goldman Sachs and others predict, oil hits $US100 ($129) per barrel in the next few years, the world will become very focused on the efficient use of oil.

Hybrid vehicles will take off, large petrol-guzzling four-wheel drives will be bought only by those who need them and large amounts of capital will flow into alternative energy companies and research. Energy independence will become a key priority for many countries and with that level of priority, combined with a focus on climate change, renewable energy may well rise from oil's ashes.

Thanks, President Bush. Who would have thought he could achieve such a startling turnaround in favour of the global environment? Under US leadership, the world has failed for several decades to face up to the obvious: reliance on oil is dumb security strategy, irresponsible economic planning and dangerous environmental policy.

As The New York Times's columnist Tom Friedman argued recently: "By doing nothing to lower US oil consumption, we are financing both sides in the war on terrorism and strengthening the worst governments in the world. That is, we are financing the US military with our tax dollars and we are financing the jihadists - and the Saudi, Sudanese and Iranian mosques and charities that support them - through our [petrol] purchases. The oil boom is also entrenching the autocrats in Russia and Venezuela, which is becoming Castro's Cuba with oil.

"By doing nothing to reduce US oil consumption, we are also setting up a global competition with China for energy resources, including right on our doorstep in Canada and Venezuela. Don't kid yourself; China's foreign policy today is very simple: holding on to Taiwan and looking for oil."

Friedman then went on to argue for taxes to double US petrol prices as a part of what he calls a "geo-green" national security strategy. Maybe the market will do it for him.

So why do I give Bush the credit for the projected super spike in oil prices? Climate change is by any reasonable judgment a risk that warrants significant action. Yet Bush has scuttled the world's efforts to tackle this, with the help of Exxon Mobil chief executive Lee Raymond and other oil industry friends. Under this leadership, the American people have been led to believe climate change doesn't matter, oil will keep flowing and there's really no need to worry. Cheap energy equals freedom! Go buy that petrol guzzler - it's un-American not to. Up goes oil demand.

Then he invades Iraq. Blood for oil? I doubt it. This was more about US power in the region and the world, with oil a convenient side effect. He really does believe he's spreading democracy and freedom, as he defines it. But as a consequence, world oil markets are spooked. Oil production in Iraq could be boosted if the country were stable, but that isn't going to happen anytime soon. Markets are also jittery about terrorist attacks on other oil suppliers in the region. Up go oil prices again.

Meanwhile, Bush is spending and driving up US debt like there is no tomorrow - does he know something we don't? So US demand for everything goes up, the Chinese economy booms on the back of it and China sucks up the world's oil supplies. Oil demand is thereby entrenched on a clear upward trajectory.

Despite decades of effort, the world's scientists and environmentalists have failed to get the world to focus on reducing oil use. But Bush has managed it. Of course, he is not responsible for "peak oil", as it is called - the point where oil production peaks and goes into decline. That was coming regardless. What he has done is make it a 2005 issue rather than a 2025 issue. That's big.

What it means is that we're likely to see oil prices rise earlier and keep rising until the point where peak oil becomes clear and prices stay there until we reduce demand dramatically. Perhaps over $US100 as Goldman Sachs predicts. In response, we'll see dramatic shifts in the economic prospects of, and balance between, countries, sectors and companies.

Who's ready for this new world? Not the US car industry, which makes its money on gas guzzlers and is laden with pension and healthcare costs. Those who are ready for it, such as Toyota, already have higher petrol prices in their home markets. The US car industry has been led by Bush and Raymond into the deluded belief that the world will stay as it is, that cheap energy is a basic freedom. Will they recover? Probably not. But that will be a sideshow to the main game anyway. The shake-out in the global economy will be more dramatic than that.

What does this all this mean for Australia? It means we need clear policy and market action to prepare for this new world. Higher oil prices won't destroy the economy unless we're not ready for them. We need to take measures now, such as capping carbon emissions to reduce our reliance on oil so we can have a staged transition rather than an economic shock. The sooner we act, the smoother it will be. It is good strategy for Australia's national security, economy and environment.

And, by George, we can all go to sleep tonight feeling a little better about the prospects for the global environment. Who would have thought it?