Big Oil — enemy of people and planet

June 20, 2008

The latest surge in the spot price of crude oil (to US$139 a barrel — 87.4 cents a litre) dramatises the urgent need for society to wean itself off "black gold". The longer we remain hooked the greater the devastation both to our environment and to the living standards of millions, especially the poorest peoples of the planet.

The challenge is huge. The response must combine defence against the threat to livelihoods from price rises with a plan to restructure economies and ways of living so that oil-intensive production and transport become things of the past.

Many pro-market commentators, and not a few environmentalists, welcome the latest oil price hike (which means the real price of oil has risen 400% in the last six years, greater than in 1970s oil crises) as bringing us closer to that goal. They bemoan the "cheap populism" of the Coalition's proposed five cents a litre cut in petrol excise and the Rudd government's FuelWatch scheme.

The Australian Financial Review's economics editor, Alan Mitchell, wrote on May 28: "What our leaders should be telling voters is that the price of petrol has nowhere to go but up, and that they should take that into account when they buy their next car and make their next decision about where to live."

And what about those billions of consumers of fossil fuels whose lives aren't focused on getting out of a gas-guzzling four-wheel drive and into a Toyota Prius? Can the urban poor of Jakarta react to the Indonesian government's planned 28.7% increase in fuel prices by switching to solar panels? How should the Yorkshire fishing family whose weekly fuel bill has gone from $4000 to over $9000 in the space of a year respond to this "price signal"?

What should be done about the $700-a-year increase in average Australian family expenditure that recent petrol price rises are reckoned to bring?

Defending living standards

The most immediate challenge the oil price surge creates is how to stop the burden of the crisis being placed on the shoulders of working people and the poor. But defence of people's livelihoods is also critical to make sure that the shift away from fossil-fuel dependent energy wins the mass social support it will need if it is actually to happen.

Here, those environmentalists who think that increases in oil prices are to be welcomed because they are producing a (still minor) shift to diesel and hybrid cars and public transport are dangerously deceived. If the movement against global warming doesn't propose its own treatment for the pain of oil price hikes, it abandons the field to the Brendan Nelsons and even worse anti-environmental political rogues.

Take, as a warning sign, the recent demise at the polls of London mayor Ken Livingston, who with the best intentions in the world introduced parking fees in the inner city, but without sufficient improvements in public transport to reduce people's car and petrol dependence.

It's important to grasp that it's not true in the short term that the retail price of petrol "has nowhere to go but up". And that's not just because the latest oil price hike contains a big speculative bubble that will burst sooner or later.

It's because there's a huge difference between the cost of extraction of crude oil and the final retail price of petrol. In between come the profits of the oil corporations, the wholesalers (often the same companies), the shippers and government taxes.

Start with the cost of oil extraction. According to the Bank of Kuwait, crude oil at US$100 a barrel yields the following astronomical rates of profit, which are based on the production cost of a litre (given here in brackets): Kuwait 488% (11 cents); United Arab Emirates 300% (16 cents); Saudi Arabia and Qatar 233% (19 cents); Canadian oil sands 203% (21 cents); and Bahrain and Oman 150% (25 cents).

Next along the chain comes refining. According to the December 2007 Australian Competition and Consumer Commission (ACCC) report Petrol Prices and Australian Consumers, "the major refiners have established a comfortable oligopoly" that conducts a "policy of pricing locally refined petrol on the basis [of] an imported equivalent product rather than the actual cost of domestic refining or even the actual cost of imports".

The ACCC calculated that when unleaded petrol retailed for 121.6 cents a litre in 2007, the suspect "import parity price" was 56.1 cents, the refiner margin 3.7 cents, the wholesale margin 8.1 cents, government taxes (petroleum excise and wholesale and retail GST) 49.2 cents and the retail margin 4.4 cents.

These figures make nonsense of Kevin Rudd's claim that the federal government has done everything "physically possible" to contain oil price increases. A government that was prepared to confront the impact of such surges could:

•Set a maximum retail price and adjust fuel excise and consumption tax rates accordingly (presently being considered by the Italian, Spanish and French governments).

•Set limits to retail price movements and the various margins (refiner, wholesale and retail). In June 2007, the refiner margin in Australia jumped to over 12 cents, provoking the ACCC inquiry. Regulation along these lines has been introduced in Belgium and is presently being pushed in the Portuguese parliament by the Left Bloc. According to Bloc spokesperson and economist Francisco Louca, simple anti-speculative rules like these could cut prices at the pump between 10 and 14 cents a litre.

Nationalise the oil corporations

Nonetheless, in today's world of long-run rising oil extraction costs these sorts of measures will only bring temporary relief given the ever-present likelihood of a long-run shortfall in supply and as long as the industry remains profit-driven and in private hands. Seriously tackling the impact of oil prices on living standards will require the nationalisation of big oil (meaning Shell, Mobil, Caltex and BP in Australia).

This is not just the only way to know the true accounts of the oil corporations, which the ACCC was never actually certain it had in its hands. Nationalisation of big oil is also critical to carrying out the program for energy sustainability that will have eliminating oil dependence at its core.

The movement against global warming needs to fight for the nationalisation of big oil for exactly the same reasons that it fights the privatisation of carbon-intensive electricity generation in New South Wales: without public ownership of the commanding heights of energy production, the capacity to plan the rapid transition to renewable technologies disappears.

It is also the only framework in which a right price for oil-based products can be found: not so low as to provide no incentive to reduce consumption, and not so high as to undermine the livelihoods of workers, family farmers, the self-employed and people on welfare.

In November 2006, the world price of crude was 38 cents a litre and retail prices ranged from Venezuela's three cents a litre (involving a subsidy of 35 cents a litre) to Iceland's 186 cents a litre (with the highest fuel taxes in the world).

On January 21, 2007, Venezuelan president Hugo Chavez told the audience of his weekly TV program Alo Presidente that the price of petrol was far too low. "We haven't touched the price of petrol for eight years. It's really gross to sell petrol the way we've been selling it, it would be better to give it away."

Full compensation

Our case in Australia is the complete opposite. Confronted with a Rudd government determined to do practically nothing about soaring petrol and food prices, the union movement must demand full compensation for the increases in the cost of living they produce.

Indeed, the oil price surge is a sharp reminder of the need for full indexation of wages and welfare payments, a position that the trade union movement should never have abandoned. As the world economy again faces a 1970s prospect of "stagflation" (rising unemployment and inflation) and the central banks move to make working people — especially those with mortgage debt — pay the price of controlling the price level, the Australian union movement cannot defend working people if it maintains support for the Reserve Bank's inflation-targeting regime.

There's only one solution to the oil price crisis: the union and environment movements must fight side by side against the devastation the Shells and Exxons of the world are wreaking on our planet and the livelihoods of its peoples.

[Dick Nichols is the national coordinator of the Socialist Alliance. For sources used in this article contact]

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