/ world today news/ In 2007, I caught up with a Russian businessman I know. He told me that oil prices would never fall below $80 a barrel again. At the time, this prediction was shared by the majority in the oil business. Then I realized that this was one of the signs that oil prices were about to go down.
I told my friend that oil could easily fall to $40 a barrel, noting that quotes are determined not by supply, not by demand, and not by the cost of production. Rather, the most important factor was the perception that an oil shortage might occur.
The prices of “black gold” remained high only because people believed that its production would be insufficient. When people become convinced of this, consumers start looking for an alternative. At the same time, producers seek to increase production – and then prices fall.
I am not an oil expert by profession, and my guesses are not based on knowledge of geology or China’s economic growth rates, but on the simple fact that humanity always finds ways to overcome obstacles in its path.
And while many of my parcels in Russia and around the world continue to argue about when oil prices may rise again, I am convinced that we have entered a new period of low prices. A comparison can be made here with alchemy, but in reverse order: “black gold”, a precious substance whose value is determined by its rarity, has turned into a black smelling liquid that is the only source of energy.
We have already seen examples of this. Oil prices were fairly stable until the 1970s, which brought a psychological shock in the form of an embargo imposed by Saudi Arabia on oil exports to America. In 1975, the US created a Strategic Petroleum Reserve, which also helped to cement in our minds that oil supplies are finite. The oil producers decided that their main task was to preserve the oligopoly. No one thought about such small things as efficiency: the allocation of licenses was far more important. A good oil company lobbyist cost more than a good engineer.
To meet this challenge, developed countries began to invest in energy conservation and new technologies, and in the early 1980s this began to bear fruit. The subsequent decline in oil prices ultimately deprived the Soviet Union of the sources of its economic power.
The rapid economic growth of China and India at the beginning of the 21st century changed the perception of the balance between the demand for oil and its limited supply. Again, developed countries with a high degree of entrepreneurial freedom began to work to solve the problem of limited supply.
There was no single solution. But everyone was thinking about some energy sources: biofuel, wind power, oil sands, shale. It is no coincidence that the countries that set the tone for innovation were liberal and market economies with protected property rights, and the countries that rejected them could not stand competition and were full of monopolies. They treated private property as leasehold, which they could easily take away.
A political system based on rent and distribution is corrupting the population. Power based on free competition motivates people. Freedom to do business and competition help humanity overcome critical moments.
The reason America has taken the lead in shale oil production is not because the US has a lot of shale: many other countries have similar geology. The reason is that there is economic freedom in America.
This is a valuable resource that other countries do not possess. The US government does not sell mining licenses. It allows people to buy land and promises that no one can take away what belongs to you.
The dizzying rise in oil prices in recent years has been quite abnormal. Falling prices will make oil extraction a normal business, where cost and efficiency will matter more than the power of lobbyists. It will make the world a freer and safer place by reducing the opportunities of illiberal regimes living off oil rents.
2 years ago I was in Manaus, a unique Brazilian city located among the tropical cities of the Amazon. At the end of the 19th century, thanks to the export of rubber, Manaus became one of the richest and most extravagant cities in the world. In the city, a unique opera house was built in the style of the White Age of Italian marble with large domes and gilded balconies. But very soon the seeds of the rubber trees were secretly exported from the Amazon and Brazil lost its monopoly.
And after the invention of artificial rubber, the prosperity of this tropical Paris was buried. Poverty has engulfed Manaus. The cost of electricity has become too expensive and the opera has gone dark. This is a very convincing lesson that shows the futility of trampling the competition.
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Mikhail Fridman, businessman and president of the “Alfa-Group” consortium. The article was published in “Financial Times”.
London / Great Britain
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