Opec's resistance to increasing production could hurt in the long run

15 January 2008

January isn't even halfway finished, and already change is in the wind.

At the massive North American International Auto Show in Detroit, which opened to the press this week, there is a definite shift away from the gas guzzlers that roam US highways towards vehicles that use alternative fuels. At every turn, there are hybrids, new forms of diesels and other environmentally conscious vehicles.

General Motors is showing off its concept electric hybrid based on a Saturn Opel and is putting a brand spanking new Saturn Vue hybrid on the market this year. Meanwhile Toyota is out with a gas-electric hybrid pickup, adding to its existing lineup of Prius and Camry hybrids.

I couldn't help but laugh when one Newsweek writer said the show was so saturated with green vehicles "it should be renamed the Detroit Lawn and Garden Show".

And while it bears repeating that many of the vehicles at the show are concept only and will never make it to market, there is no question that trends are shifting towards vehicles that use fewer or no fossil fuels.

It would be great to think that automakers are worried about the rainforest, but truth be told the record high price of oil - which translates to increasingly expensive petrol and diesel - is what is driving companies to look at alternatives to traditional fuels.

While in the short term, high oil prices are going to be a boom for Gulf economies, especially Saudi Arabia, Kuwait and the UAE, Opec's resistance to increasing production may be damaging in the long run.

Opec Secretary-General Abdullah Al Badri toed the group's line a few days ago when he reiterated that it is purely speculation that is driving up prices, not a shortage of oil.

"There is no shortage in the market... We are ready to supply the market with additional quantities of oil if basic market fundamentals justify such a move," Al Badri told a newspaper in Cyprus.

"In my view, the basic reason for which we have been seeing higher prices since last September is because of speculation."

Research

But while money is flowing into coffers now, it is also flowing into research into green fuels and vehicles. Research which was once deemed too expensive is now practical, with oil prices having broken the $100 mark.

In the US, the average price for gasoline has gained almost 10 cents over the last three weeks, with the average price for a gallon of regular petrol hitting $3.07 a gallon.

Meanwhile, in the eurozone, oil prices are driving a growing demand for significant wage hikes to battle the increasing cost of living.

So why should the Gulf oil producers care?

If Europe, the US and the rest of the world are pinched too tightly they will - as they are now - begin turning away from traditional petroleum products, regardless of what is driving the cost of oil.

At the auto show, General Motors announced that it bought an ownership stake in Coskata, a renewable energy startup which plans to manufacture ethanol from agricultural, municipal and industrial waste.

And in the Gulf itself, Qatar Airways is now researching ways to power its planes with gas-to-liquid kerosene instead of traditional jet fuel. In addition to Qatar Petroleum, some big names are involved in the study - including Shell, Airbus and Rolls Royce.

With jet fuel accounting for roughly 40 per cent of airline operating costs, and as consumers continue to expect affordable tickets, today's oil prices mean the investment in research may be very cost effective in the long run.

Now the Opec countries just need to make sure they don't price themselves out of at least part of their market in the long run.

The writer is a freelance journalist based in Alaska, USA.