Why Big Oil is not to blame for fuel prices

It is the same every time the price of oil rises. Television news editors send camera crews off to garner driver rage at the pumps. Green activists rant about capitalist fat cats. Government ministers - convenient amnesiacs when it comes to who takes almost 70 pence in the pound at the pumps - make dark mutterings about windfall taxes. All because of the erroneous belief the oil companies need 'reining in'.

But anyone with an understanding of basic supply and demand economics knows well enough that Big Oil is not the big player in the energy market. More often than not the oil majors are just as helpless in the face of global market forces as any other consumer.

Why are energy prices sky-high? In a word: geopolitics. The rapidly expanding economies of China and India, with a joint population of over 2 billion, have become increasingly voracious consumers of energy. China's economic growth alone is running at nine per cent and, over coming years, will only accelerate. The consequent rise in productivity has brought the Far East consumer into direct competition with Western oil consumers as never before.

Then there is the increasing political unrest in the Middle East, still the world's largest supplier of oil. Russian Gazprom's muscling out of BP and other foreign-owned investments has not helped much, either. Problems with Nigerian and Venezuelan oil (the USA's largest supplier) have all colluded to drive up prices with speculative investors making a tidy profit. And, let's face it, Opec's petro-dollar-rich sheikhs have - as in the 1970s - been reluctant to aid their Western 'partners' in this latest energy scrape.

The fact is that the days of cheap and easy-to-tap oil reserves are mostly gone. It is becoming increasingly expensive to get more of the black stuff out of the ground. So, if the oil is running out, the question is what the West can do to get a handle on prices once more.

But who said the oil was running out? The truth is that potentially massive reserves, literally trillions of barrels of oil, are lying around waiting to be tapped.

Russia's flag-planting PR stunt on the Arctic seabed last year was not about some new-found concern to protect the environment - it was about oil. Then there's the vast potential in Alaska and generally off the Americas. That's before we get to the prospect of extracting the black stuff from enormous reserves of Canadian oil sands.

This is where Big Oil's profits do have an upside. They make all of these previously non-viable hydrocarbon reserves - at least another 200-300 years' worth - a far more viable proposition.

If governments decide to plunder these profits through windfall taxes, we all lose. After all, it is pension funds and stockholder investment portfolios that 'own' Big Oil. We cannot possibly expect the oil companies to pay stockholder dividends, swell our personal pension funds and re-invest in the improved technology needed to tap these new reserves if they are artificially over-taxed.

So is the $200-plus barrel inevitable? Possibly. But the reality is that we in the West are far from helpless, unless we choose to be. An energy fix would undoubtedly take time and involve not a little pain. But, first, we should let Big Oil make its mega-bucks, re-invest in new drilling techniques and pursue formerly difficult-to-extract oil reserves.

Second, we should stop worrying quite so much about the habitat of the lesser-spotted Greenback and start drilling off Greenland, the Antarctic, Alaska and the US coast where massive reserves undoubtedly exist. Nature's Greenback will do what it has always done: adapt, moving elsewhere until the derricks are dismantled.

Third, we should turn to the world's vast natural gas reserves and, with coal-fired (Europe and America are awash with the cheap stuff) and nuclear power, let them take more of the energy strain. Opec would soon get the message and increase capacity. ·