A funny thing happened on the way to work the other day. BBC radio reported that the Chinese regime of Hu Jin Tao would increase the price of petrol by US$0.46 a gallon. In its infinite wisdom, the Chinese leadership thinks this will dampen demand for gasoline by a marauding population of desperately capitalist, car-mad Chinese. In fact, it thought it would be doing its part in lowering the global price of oil.

Guess what? World oil price dipped. And almost every major global media outlet, led by frenzied Americans, of course, was all over the story. The question they posed was whether China’s action could be the start of a downward spiral of world oil prices – just to show the oil rich Arab sheikhs that despite their cartel, their stranglehold on the world’s oil price is not a forgone conclusion after all.

So world commodity traders started factoring in the possibility that higher oil prices will lead to lower global demand and that, in the medium term, this will bring oil prices down. That, they said, may just put an end to the great bull oil market run. Oil investors and speculators alike started dumping oil stocks almost as immediately as the story broke. But guess what – yes, again? The very next day, prices started to climb – again. The bulls were back. So, too, the ear-to-ear smiles on the faces of the Arab oil sheikhs. So, whatever happened?

Global uncertainties

Forget Economics 101. It’s dumb. In fact, it’s quite worthless, especially given today’s world of price volatilities, supply bottlenecks and a number of growing global uncertainties. And another thing: despite China now having surpassed Japan as the world’s number two economy, it is, to put it crudely, not an economy that can affect world oil price down to the point that it’ll make the world’s fuel-mad motorists grin like Cheshire cats.

As some of the world’s resource ministers met in Jeddah, Saudi Arabia, on the weekend of June 21-22, the likes of the Saudis and Iraqis still controlled world oil supply and its price. In fact, the Saudi oil minister said as much: that OPEC would not be backing down, no matter what. Even Australia’s pitiful big-mouth Labour prime minister, Kevin Rudd, had promised during last November’s election campaign which he won – that he would take a blowtorch to OPEC. If anything, the blowtorch is right under Rudd’s rump, applied not only by OPEC but also angry Australian motorists who have seen gasoline retail price rise to AU$171.9 a litre. And AU$2.00 a litre isn’t that far away either.

Spotlight on China

So, what happened to the China promise for the oil bears? Quite the reverse to anything Economics 101 would teach the naïve. A higher oil price will only see higher demand, not lower it. Why? Human psychology. Call it herd, mixed with a hedonistic level of greed and stupidity. When oil prices rise, motorists are the first to rush to gasoline stations to fill up and, for safe bet, take extra gasoline tanks with them. And if they felt that gasoline prices would rise some more, would they not rush to gasoline stations again to fill up, and then some? Of course they would. And the more they do this, the higher the oil price will soar. Sooner or later, the whole charade will start to look like a dog chasing its own tail.

So who’s driving up the price of world oil? Who’s to blame? Motorists everywhere, including in China. In 1990, oil was at US$23 a barrel. Today, it’s flirting with US$140. That’s a 509 percent increase. And still the US imports 70 percent of world oil. That’s not going to stop any time soon. Then there is China, where last year, Chinese bought 5.5 million cars, minivans and SUVs plus 3 million commercial vehicles, up from just 1.6 million vehicles sold in 1997. This year alone, sales are expected to grow another 15 to 20 percent. No wonder the world’s car majors are making a beeline for the China market. And coming on stream is India – quickly.

Here’s the best part: the World Bank now forecasts that China’s GDP will grow 9.8 percent in 2008. You know what that means, right? More gasoline to fuel Chinese growth. Even if the Saudis and the rest of OPEC were to raise oil production, it is unlikely to add to world supply at such a rate that it would exceed global demand and bring down world oil prices. Quite the contrary: world demand will surge, so expect world oil price to soar even more.

Oil-hungry hypocrites?

There’s another factor at work here. World oil prices are not just reflecting global demand but also shrinking world supplies. That’s right: world oil reserves. If you ask the Saudis, or any of the oil producing countries, just how much reserves they hold, they wouldn’t be able to tell you. There’s no way of telling. And even if they do know, why would they tell anybody? It’s easier to milk the world for every last cent while the rest of the world foolishly – no, stupidly – milks every last drop of the commodity to exhaustion.

Then what? One thing’s clear: free markets must not be allowed to dictate world oil prices. Until a credible alternative energy source becomes available, this is the only fuel on which every economy runs, utterly depends on, and to which ordinary folks like you and I who stupidly drive our vehicles unnecessarily, are addicted. Then we whine about high oil prices. Does that not make us hypocrites and the oil rich states free market saints? Or is it Ali Baba-ism?

MANJIT BHATIA is an academic and writer and an associate partner of AsiaRisk, a risk analysis consultancy, with specialisation in international economics and politics. His writings have been published in The Wall Street Journal, Business Times Singapore, International Herald Tribune, Financial Times, The Australian, The Australian Financial Review and elsewhere.