Consumers and business go green while governments worry

A man rides his bicycle past a gas station. Soaring oil prices have made the two-wheeled vehicle a popular mode of transportation. (REUTERS)

Damien Barilko, co-founder of French electric bike seller Velocito, says sky-high gas prices are succeeding where environmental campaigners have failed: persuading motorists to go green.

After doing the math, Velocito customers are prepared to spend up to $4,600 (Dh16,928) on an eco-friendly bike to save on gas bills. Sales have doubled each year since the first store opened in Paris in 2005.

“We at the store are motivated by the fact that it’s a clean mode of transportation,” Barilko told The Associated Press. “But most people come for economic reasons: the ecological reasons are an afterthought.”

Unlike the energy crises of the 1970s, when the oil price spike was temporary, analysts say high energy prices could be here to stay. A sustained price increase will hit businesses and consumers on almost every conceivable level, and living with this could change global behavior for good.

“We are getting fuel efficiency and we are getting it real fast – and the government has nothing to do with it,” said John Kingston, global director for oil at Platts, a leading energy trade publication.

“The power of the market is far more powerful than the government. Most people are convinced that this is not going to go away.”

Or, as Velocito puts it on their website, “Fill ‘er up for €5 a year?” – (or about $7.70) in electricity.

Month-ahead oil futures settled at a record $138.54 a barrel on the Nymex exchange in New York last Friday – more than double the level of $65.96 from a year before – leaving global leaders struggling to find a way to calm global jitters. Oil will be the focus of finance ministers from the Group of Eight industrialized nations meeting this week in Japan.

Soaring crude, costs combined with rising food prices, have created inflationary risks not seen in years, despite the slowing global economy.

There are signs that the global appetite for oil is abating, thanks to the combination of high prices and a sluggish economy.

The Paris-based International Energy Agency predicts global demand for petroleum products such as gasoline, diesel and heating oil will grow by 0.9 per cent, or 800,000 barrels a day, in 2008. That’s down from the 1.2 per cent, or 1 million barrels, the IEA forecast earlier this year. Manouchehr Takin, an analyst at the Center for Global Energy Studies in London, predicts an even smaller increase of 600,000 barrels a day this year and says the pace of growth has been ebbing since 2004.

In the US, the world’s largest energy guzzler, consumers are cutting back on their consumption of gas in response to the high prices, with gas consumption falling 1.3 per cent for the four weeks ending June 6 from the same period a year ago. High fuel prices are also causing a shift in consumers’ car-buying habits; General Motors Corp announced plans last week to close four pickup truck and SUV plants, saying high fuel prices have cut sales.

Businesses are restricting travel and opting for teleconferencing, as well as trying to pass increased fuel bills on to consumers.

The Dow Chemical Co raised prices 20 per cent across the board on its products. The company makes ingredients for a huge range of products including paint, detergent, antifreeze, solvents, cosmetics, diapers, textiles, glass, packaging and cars.

Home builders say they are getting killed by the price of foam insulation and plastic piping. Airlines are increasing fuel surcharges, adding a baggage surcharge, reducing capacity, deferring plane orders or shedding jobs.

“People are so upset with the price and its hurting our economy so much: that’s the only time people change,” said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com.

But while oil demand is cooling in the US and Europe, the rapidly growing economies of China and India are gobbling up the slack.

“Whatever cuts are made today by the major players of 30 years ago are all going to be eaten up by nations that weren’t even on the radar screen then,” said Global Insight analyst Mary Novak. “There is no more supply, there is only demand.”

Prices at the pump vary startlingly – from Venezuela, where gas is cheaper than water, to Turkey, where a full tank can cost more than a domestic plane ticket. That’s partly due to different tax regimes – but also to subsidies in Asia and the Middle East which shield consumers but weigh increasingly heavily on government budgets.

Malaysia and India recently reduced subsidies – and analysts such as Michael Lynch of Strategic Energy & Economic Research Inc in Winchester, Mass, said others will follow. “At this level of prices, very few countries can afford subsidies if they are importing,” he said.

In Europe, where consumers are accustomed to high taxes, governments are split on how to deal with the runaway prices – and their protesting citizens.

French President Nicolas Sarkozy has urged his EU partners to suspend part of the value-added taxes, but his proposals have found few takers in other European capitals. Nor has Italy been more successful with its proposal for a “Robin Hood” tax on oil companies’ profits – to fund aid for low-income households.

“In the short term, changes will be seen mostly in the actions of the consumer,” said Takin.

Meanwhile, Saudi Arabia, the world’s largest oil producer, has called a meeting of oil producing countries and consumers on June 22. The most influential member of the Organization of Petroleum Exporting Countries is concerned that sustained high oil prices will eventually slacken the world’s appetite for oil, affecting them in the long run.

Opec has been reluctant to boost production, arguing that prices are being set by speculators and geopolitical jitters – not short supply – combined with lagging US refinery capacity, which means refiners cannot process the crude already on the market.

Some argue that prices are being artificially boosted by investor speculation.

Paul Stevens, a researcher on the Energy, Environment and Development Program at the UK’s Chatham House, says prices could “come down very quickly or very significantly” – by as much as $50 a barrel – when investors realise “there isn’t any imminent shortage.”

That would still leave prices more expensive than a year ago.

 

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