IF the Federal
Reserve Board’s monetary-policy gurus have any doubt that
“possible increases in resource utilisation ... have the
potential to add to inflation pressures”, as they said in last
week’s statement accompanying their 13th consecutive increase in
interest rates, they need look no further than Shell’s
announcement the following day.
The new consensus that crude oil prices will stay at or
above $50 a barrel has had several consequences. Like its
oil-industry competitors, Shell has raised its spending on
exploration and development, in its case by 27% to $19 billion
(£10.7 billion). Kuwait has decided to draw on western expertise
to help it develop its untapped reserves, which look a lot more
attractive at $50 than they did at $10. Other oil companies are
scrambling for drilling rigs, labour and supplies.
The expectation that oil prices will stay high reflects the
continued pressure economic growth in America, India and China
is putting on oil supplies.
Demand is also pressing on the supply of natural gas in
many countries. In America, cold weather is driving demand and
prices to levels unimagined when natural gas became the fuel of
choice for power generators, many of whom are ruing that
decision. In Britain, rising demand and monopoly constraints on
supplies from the Continent are having the same effect on
prices. And western Europe will face a difficult winter if a
dispute between Russia and Ukraine, through which Russian
natural gas passes en route to Germany and elsewhere, is not
Electricity shortages also threaten, or at least are seen
by policymakers and large users as likely to occur before the
decade is out. So nuclear power is once again being considered
as a solution to the problem of keeping the factories running
without increasing carbon emissions. And much of the political
opposition to wind farms from all except the hardcore Nimby
crowd seems to be dissipating, clearing the way for increased
production of electricity from wind.
But the willingness of investors to come up with the money
needed to augment energy supplies cannot alone solve the supply
problem, at least not soon. It seems that there is a shortage of
many of the resources needed to find and to construct new
sources of energy.
Drilling rigs are in short supply, as are trained oilfield
workers. This is why fully one-quarter of the $4 billion
increase in Shell’s outlays will go to cover the higher prices
of the labour and supplies it needs to punch holes in the
deserts and ocean beds that contain the new reserves it so badly
needs. That’s just what the Federal Reserve has in mind when it
worries that resource constraints might result in an
inflation-inducing bidding war for supplies and labour.
The situation in the wind business is no different.
Promoters and operators of wind farms are finding that they
simply cannot get the machines (windmills, to us lay folk) they
need. In some instances, manufacturers are diverting supplies to
the United States to take advantage of a new and attractive tax
regime. In all instances, prices are rising and waiting times
for delivery are lengthening.
Nuclear advocates, too, have to confront a shortage of
resources, most notably the skilled technicians needed to build
and operate these facilities. With no new nuclear plants built
in the United States for decades, the engineers and other highly
trained staff that build these have drifted into other jobs. It
will be no easy thing to reconstruct a workforce capable of
building safe plants, once plans to start construction get the
multiple planning and safety approvals they need — if they ever
The inability to expand energy supplies creates a
political problem. The political and economic cycles are out of
joint. Higher prices for energy will, eventually, call forth
additional supplies and curtail consumption. But “eventually” is
not good enough for politicians, who must do, or at least be
seen to do, something right away.
So we get counterproductive moves such as chancellor
Gordon Brown’s retroactive windfall- profits tax on oil
companies, and a similar move by America’s Congress to
appropriate “excess profits” while lavishing subsidies on
uneconomic sources of energy. Everywhere, politicians express a
new interest in nuclear power, but no interest in learning about
Meanwhile, the American economy seems to survive the waste
created by politicians’ renewed interest in energy, and their
unwillingness to give markets the time needed to sort things
out. Growth continues at an annual rate of something like 4%.
The drop in petrol prices to about $2 a gallon, from a high of
$3, has increased both consumer confidence and the level of
cheer in America’s boardrooms.
A survey by TEC International, the “world’s largest
organisation of CEOs” of small and mid-sized companies, shows
that “on average, a majority of CEOs expects to see increased
sales revenues, profits, investments, and employee numbers” in
the next 12 months.
More significant from the point of vies of the Federal
Reserve is the fact that more than half of the chief executives
plan to raise prices next year. Those pundits who are expecting
the current cycle of rate increases to end when Alan Greenspan
leaves the stage in January, might want to think again. It is
true that short-term rates are now 3.25% above their low in
2004, and that the housing market is showing signs of cooling.
But in real, inflation-adjusted terms, interest rates are still
only a bit above 2%, which is below the long-term average, and
not deemed likely to stifle growth.
As the Federal Reserve watches Shell being forced to pay
more for labour and supplies, and hears that chief executives
are thinking about raising product prices, it is not likely to
abandon the Greenspan upward ratchet merely because it has a new
Irwin Stelzer is a business adviser and director of
economic policy studies at the Hudson Institute. He has served
as a consultant to many energy companies and advises a leading
developer of wind farms.