CRISIS OR OPPORTUNITY?

Here in Wales, we have over the years suffered from the loss of jobs overseas, as unscrupulous employers have (chasing higher profits by squeezing wages) moved their business overseas in search of cheaper labour leaving some of our more vulnerable communities up against it after years of loyal service. One thing that may change this unhappy state of affairs is the fact that as oil prices rise distance costs money.

This simple fact could have a significant impact on our country's economy as increased fuel costs will impact on company profits and indirectly provide an opportunity to revitalise our economy. Trade patterns change constantly, they will be altered by increased transportation costs, which will bite deeply into profits made by finding cheap labour in distant lands.

It is worth sparing some thought as to how we got to where we are; between 1960 and 1973 the percentage of exports as a share of world GDP rose by over 50%. This can be partially put down to to a combination of relatively cheap fuel (oil was around $14 dollars a barrel during this period) and an aggressive effort by the West to reduce trade barriers around the world.

Even factoring the effects of the 1973 oil crisis and the (with retrospect) the somewhat heated final lingering spasm of the cold war in the late 1970's/1980's there was a spectacular growth in world trade and further removal of tariff barriers between 1987 and 2002, when the average price of oil remained around $25 dollars a barrel.

It is worth noting (largely unnoticed in Europe where where we had our our problems) that the oil crisis of 1973/74 increased five fold the cost of shipping goods across the Atlantic and the Pacific and led to a 6% drop in US non fuel related imports and a corresponding growth in imports from Latin America and the Caribbean. I mention this because we have all lived with the rise in fuel prices over the last few years, there has also been a corresponding rise in shipping costs, something that will make manufacturing in distant lands increasingly uneconomic.

Over the last twenty years container ships have got bigger, they spend more time at sea than in port (85% in 2009 as compared with 55% some 15 years previously). The average container ship has also grown considerably larger along with the amount of goods carried by container has also grown from 35% to 75%. They have also become considerably faster something that has led to greater fuel consumption, which when combined with rising fuel prices begins to eat into profit margins of companies and organisations that relocated their manufacturing enterprises to distant lands.

Any economist will tell you that there is a direct link between transport costs and the price of the goods that we buy. The increase in oil prices between 2002 and 2009 roughly from £30 dollars a barrel to over $100 dollars a barrel increased the shipping companies costs and reduced the profits of their customers. The daily fuel bill for an average cargo ship increased from $9,500 dollars to $32,000 dollars and import costs (for the USA) rose on a standard 40 foot container travelling across the Pacific from China to the USA from $455 dollars to $1,100 dollars (between January 2007 and the end of 2008).

Despite a relative drop in fuel prices since the recession triggered by the World banking crisis we face a result of the consequences of peak oil in the near future a radical change in the way the world trades. There is a distinct possibility that it may become cheaper to manufacture goods closer to the market place rather than in more distant lands - the future energy and food crisis's aside for the moment - the real question that needs to be asked and answered is how we in Wales can take advantage of this situation and reboot our manufacturing economy in a sustainable way?

ON THE FIDDLE...

Last week the price of oil fell after the International Energy Agency announced that its members would sell some of their reserves on the world market.The International Energy Agency (IEA) stated that the move was in response to the disruption in supplies caused by the Libyan conflict. The plan envisaged a release of an extra 60 million barrels of oil on to the world market.

The US government announced that 30m barrels, half of the total, would be released from its Strategic Petroleum Reserve. The UK planned to contribute three million barrels.The release has been designed to reduce the price of oil further in order to protect the economy.Oil Industry analysts have warned that there is a risk the IEA's latest move may hurt relations with major oil exporters i.e OPEC.

In truth any short term economic effect caused by the release of oil reserves will be cancelled over the medium term by a combination of increased demand and the effects of falling production. IEA members are required to hold sufficient stocks of oil to last 90 days without any imports (currently the IEA says its members are holding enough for 146 days or 4.1 billion barrels). IEA members have agreed to make two million barrels of this available every day for 30 days in an effort to increase the amount of oil on the market and therefore reduce the price.

The IEA also says that it will review the market again in 30 days time. The Saudi's incidentally have come out and said that they would be increasing production to meet demand - it will be interesting to see if this actually happens considering the potentially perilous state of production form the Ghawar and Safanyia oilfields. Either way no doubt OPEC will reduce production to maximise their profits and mitigate the IEA's decision.

just for the record as we begin to face the effects of peak oil, it is worth noting that oil consumption in Canada and the United states has grown by 20% since 1980 and is up 63% in Australia and 74% in New Zealand, obviously the Chinese are also using more oil than previously to feed their growing economy. Prior to 2008 the IEA itself said that production form the world's oil wells are is declining at a rate of 3.7% per year. After 2008 the IEA vigorous revision of it's figures and stated this rate of decline actually stands at 6.7%.

Why does the phrase fiddling whilst Rome burns come to mind...

FUEL PRICES DEBATE

Plaid and the SNP have a debate at Westminster (this afternoon) which will help to pressurise the UK government into taking action on rising fuel prices (which is hitting all of us either directly or indirectly). Plaid and the SNP are calling for the Con Dem Government to consider a regulator to cut fuel duty when oil prices rise. Both parties will make their case during an opposition debate in the Commons.

Speaking ahead of the debate, Plaid Cymru spokesperson for Transport, Jonathan Edwards MP, said:

“Plaid Cymru and the SNP recognised this problem long ago – we pushed for it in Budgets in 2005 and 2008 with widespread support from real people outside parliament. Unfortunately, Labour stubbornly ignored the problems of rising fuel prices while the Conservatives scared of supporting our idea decided to steal it, water it down and re-brand it as their own. There has been a massive hike in the cost of fuel recently, not all of it down to the rising cost of oil. The Tory-led Government's VAT increase and fuel duty hike have pushed the price of a litre up by at least 3.5p in the last month alone.Businesses and especially families in rural areas, especially in many parts of Wales, where a car is a necessity not a luxury are those who are facing the pain because of these choices. For the short-term we need to have a fuel duty stabiliser and a special price for fuel in rural areas, but we also need to diversify and invest in renewable energy alternatives to reduce our reliance upon oil and other fossil fuels.”

SNP Treasury spokesperson Stewart Hosie MP said:

"This may be the only opportunity MPs will have to debate fuel prices ahead of the Budget in March and the fuel duty increase in April, and so it is crucial that we persuade the Tory-led government to honour its pre-election pledge and establish a fuel duty regulator.The country is crying out for action to bring down fuel prices, and this SNP / Plaid debate will be a focus for that. Westminster's inaction has made this an enormous issue for the Scottish Parliament elections in May. Its a huge issue on the doorstep and the forecourts because and a key illustration of why we need to build up Scotland’s Parliament, and equip it with the full powers of financial responsibility. A Fuel Duty Regulator – which the Tories supported before the election – would bring duty down when oil prices go up. Cutting fuel by 10p per litre in Scotland would only cost about half of the estimated £1 billion in extra revenue the Treasury is set to rake in as a result of rising oil prices. It's a national scandal that in Europe's oil-richest country, Scots are paying among the highest fuel prices.”

Plaid Cymru / SNP motion:


This House notes the oil price has reached $100 a barrel; that diesel in the UK is the most expensive in Europe; further notes that the combination of the 1 January 2011 duty rise and the VAT increase is estimated to have added 3.5p to the cost of a litre of fuel; acknowledges the sharp rises in fuel prices over the past year and the resulting impact on headline inflation figures; recognises the financial pressure this places on hard pressed families and businesses already struggling with high inflation and the impact of the recent VAT rise; condemns the government's continued dithering over the implementation of a fuel duty regulator (or stabiliser) as neither a sustainable or stable way to make tax policy; further recognises the specific additional fuel costs for those living in remote and rural parts of the UK; is concerned that diesel in such places is approaching £7 per gallon; condemns the Government for its failure to prioritise the implementation of a fuel duty derogation; and calls for the introduction of a fuel duty derogation to the most remote areas at the earliest opportunity.

The Conservative Party had promised to look into a "fair fuel stabiliser" in their election manifesto, back in January, David Cameron was considering ways to help cash-strapped motorists. More recently, however,  Cameron has played down the possibility of a "fair fuel stabiliser" to limit fuel duty rises. The fact that UK Government benefits to the tune of 600 million a week in fuel duty may be a contributory factor in relation to the PM’s indecision, just as it was with former New Labour PM, Gordon Brown, perhaps Mr Cameron should declare an interest?

TIME TO DECLARE AN INTEREST?

Everybody is getting hit hard by the high fuel prices, if the Prime Minister breaks his promises on introducing a fuel duty stabiliser then the poorest in society suffering more than the rest of us. The Conservative Party promised to look into a "fair fuel stabiliser" in their election manifesto, in early January, David Cameron said he was considering ways to help cash-strapped motorists. More recently Cameron has played down the possibility of a "fair fuel stabiliser" to limit fuel duty rises. The fact that UK Government benefits to the tune of 600 million a week in fuel duty may be a contributory factor in relation to the PM’s indecision, just as it was with former New Labour PM, Gordon Brown, perhaps Mr Cameron should declare an interest?

There is an urgent need to see measures put in place to stabilise prices before they rocket even higher. Implementing a Fuel Duty Regulator would at least bring duty down when oil prices go up – and cap prices at the petrol pump. I think that there is little chance that Cameron will keep to his word or his election pledge on introducing a fuel duty stabiliser, as this UK Coalition Government seems to have shed any real principles as regularly as the snow melts in warmer weather.

The Federation of Small Businesses (FSB) says the UK now has the second highest diesel price in Europe - something which it says is causing great difficulties for hauliers and other businesses dependent on road transport. They point out that in Europe, the total price is split about 50/50 between the cost of the fuel itself and tax, yet, in the UK, the average product price is 38% of the total, with the remaining 62% coming from tax. Fuel duty already costs 58.95p for every litre. Average prices at the pump are now around 127p per litre and the Retail Motor Industry Federation has written to the Chancellor asking him to scrap the planned fuel duty increase, due in April.

Prices reached $147 a barrel before the recession in 2008 but are currently about $100 a barrel. The average price of petrol is rising at the highest rate for 10 years. The average cost of a litre of unleaded petrol has gone up by 6.13p since mid-December to a record 128.27p (£5.83 a gallon). The price of diesel is even higher and in some rural areas the cost of fuel is more than 20p a litre above the average figure. There are further increases in duty planned for April as well as expected rises in the price of oil. The 4th January VAT hike to 20% and a simultaneous rise in fuel duty, did little to help matters, as motorists saw 3.5p added to the cost of a litre.

Plaid Cymru has long favoured a new system of regulating tax on fuel in order to mitigate the effects of high prices at the pumps, and for a fuel duty regulator to cap the price of petrol at the pump when it rises too quickly. Wholesale oil prices will inevitably rise over the next few years as the world economy re-builds itself in the face of an increasing demand for oil and all of us will pay for higher fuel prices directly or indirectly. What's needed is an increase in sustained investment in renewable energy sources which would boost our economy without damaging the planet. It is scandalous that Wales was left out of recent pilot programmes for electric cars, but recent experience tells that for many Westminster Governments (Conservative or New Labour) Wales is so often out of sight and out of mind.