Reaping the windfall
Posted Aug 26, 2008 by Richard Douthwaite
[Excerpt] There are windfall gains and windfall gains. The ones being made at the moment by British energy companies are as nothing in comparison with those enjoyed by the world's fossil fuel producers. These are so great that they are causing the world economy to collapse.
Both gains are as a result of scarcity. The supply of oil has not been able to keep up with world demand. This has pushed up prices and delivered enormous profits because most currently-active oilfields were developed on the assumption that the price of oil would be about $20 a barrel, whereas it is now six times that.
If one increases the $20 figure to $30 to allow for inflation, more than half of the $1.9tn which was paid for oil last year when oil averaged $64.20 a barrel was actually "scarcity rent", the term economists use to refer to the extra people are forced to pay when something is in short supply. The rent amounted to around $1tn, roughly 2% of gross world product. Coal and gas producers also received rental payments but the oil rent alone worked out at $151 for everyone on Earth.
If we assume that the average oil price this year has been around $120, the scarcity rent the oil producers are getting amounts to 6% of everything being produced in the world.
The problem with that is that the producers are not buying and consuming anything like that part of the world's production. Instead, they are either lending the rent out through the wholesale money markets or using it to buy stakes in banks or property in heavily oil-dependent countries...
Originally published in The Guardian