Pascoe: Why we need higher oil prices  

Michael Pascoe has a column in the SMH making the case that we need higher oil prices now to avoid a supply slump caused by plummeting investment - Why we need higher oil prices. Of course, we could spend our (freshly printed) money on renewables and electric transport instead and not worry about trying to keep a dead paradigm alive for longer than it need be (I understand the "high oil prices justify investment in renewables" argument, but I don't think its a given in a world economy that isn't in the best of health anyway).

As soon as there's a lull in the reporting season, the stories will start about OPEC planning to cut production next month in an effort to boost oil prices. Let's hope it succeeds.

While not overtly anti-Muslim, there will at least be an undercurrent in some of the American commentary about sneaky Arabs, evil cartels and national security. On Fox News, it probably will be overt. They might even go right over the top and ask the Alaskan Governor for her opinion.

Yet we need higher oil prices. At $US40 a barrel in a world already capital constrained, it's not possible to attract the investment necessary for the exploration and development to fuel the global economy when the financial crisis passes.

We should see some of that explained in Woodside's results tomorrow - if CEO Don Voelte isn't too busy railing against governments, federal and state.

Just as oil prices were pushed too high in the commodities bubble, doing plenty of damage on the way up, they've now fallen too far and are doing damage by staying down.

The problem with OPEC is that it's not a very strong cartel, incapable of smoothing out the market extremes to its own longer-term advantage.

Indeed, OPEC is really not much more than Saudi Arabia and a cheer squad. Saudi Arabia is the swing producer capable of altering production levels by a couple of million barrels a day (and it's promising spare capacity of 4.5 MBD by mid-year), while the other OPEC members are as likely as not to be cheating on whatever quotas they've agreed to.

The oil price crash has helped cushion consumers during these early stages of the global recession and will play a role in the eventual recovery, but you don't have to be a "peak oil" believer to see that the hydrocarbon industry needs a lot more investment if we're to avoid another damaging price surge when global growth gets back to 4% or so.

A large part of the blame for the latest oil bubble can be laid at the feet of the previous oil price collapse when the black stuff was barely able to hold double figures. Investment in exploration and maintenance collapsed.

Now OPEC members talk of wanting an oil price of about $US70 or $US80 a barrel - a not unreasonable figure. It's enough to encourage conservation and alternative energy research as well as oil exploration and steady supply. It also would restore some spending power to the post-bubble oil nations, most obviously Russia.