Fuelling Inflation - 25 February 2000

While the flags fly and the trumpets still sound first let me say, very briefly, that Senator McCain's victory in Michigan is very deceptive and doesn't mean he's going to get even all the Michigan delegates to the Republican Convention.

Remember: in a primary the people vote for delegates who will vote for their man at the convention and the trouble with Michigan was that it was a free-for-all primary - anybody of any party could vote in this Republican primary. And three quarters of Senator McCain's votes came from independents, Democrats and young dazzled McCain groupies. Only one vote in four came from Republicans.

Now on 7 March California and New York - with a huge, a decisive number of delegates to offer the party - in those states only Republicans can vote and the Republican establishment is belligerently for Bush.

Still McCain's Michigan victory makes just barely possible the miracle that he might, by a hair's breadth, take California and/or New York. It would be, though, a miracle.

However, the American people have another date in March which could more radically affect the life and prosperity of this country than the choice of the two presidential candidates or even the outcome of the election in November.

That date is 27 March when there will be held in Vienna a meeting of Opec - the main oil-producing nations.

It will be the final meeting of a series and is known as its strategy session - which is a high-flown term for deciding what your government and your truck drivers and the grocer and the makers of plastics and the packagers everywhere and you and I and the people next door are from a given date going to have to pay for oil in various forms.

The big three of Opec - the Organisation of Petroleum Exporting Countries - are Saudi Arabia, Iran and Kuwait.

But when the bottom fell out of oil prices in the collapse, three years ago, of the Asian economies, Mexico - which is not a member of Opec - and Venezuela joined forces - or siege weapons - and followed Opec's dictate in drastically cutting production.

Now, quite suddenly, only in the past six weeks or so has there arisen a general gripe of mayors and governors and manufacturers and millions of householders from New England down to the Carolinas.

Why? Well the last two or three winters have been milder than normal in the large parts of the country - the North East especially - where the population is most dense and where therefore the call on petroleum - on heating oil - for the ordinary home owner has been unusually light.

But now we've had - are having - one of the fiercest winters in memory and by a freak of the Western wind - too complex to go into here - the Arctic weather has, this winter, descended down into the South. Twenty-two inches of snow dumped in one day in Raleigh, North Carolina, is not to be believed.

Anyway suddenly people woke up to the shocking truth that in the past year the price of oil had gone from $11 a barrel to $30.

Why didn't the city fathers and the Congress and Wall Street most of all set up a hullabaloo long before now?

Because there is a school of thought, it is prevailing - nowhere more so than in Wall Street - that oil has had its day and it's none of our business if the great Arab sheikhs decline from their stupendous wealth and go, as the saying has it, from shirtsleeves to shirtsleeves in three generations.

Listening to this paragraph from last Monday's New York Times:

"Technology which depends much less on coal, oil, the old forms of energy that manufacturing does now drives our economic growth. Accordingly Opec - the once fearsome cartel of oil-producing countries - has become impotent and oil, the old king of commodities, seems to have no more power to sway the American economy in the internet age than cotton or copper."

It's a very interesting expert belief that the Times quickly pointed out that it was one opinion, even if held by many economists and a good many people actually in the oil industry.

But the mass of people, including other experts and some Wall Street people too, had a rude change of mind when their home heating oil doubled in price. And most startlingly when, at the airports, the check-in agents would start to punch up your ticket and say: "Oh by the way there's a surcharge of $35."

"For what ma'am?"

They smile languidly. They don't have to say - aviation fuel.

I took this up with an old friend of mine I've known since he was a baby - in the interim he's been a crack airline pilot both in Vietnam and with a commercial airline and is now retired.

He reminded me that jet planes are the great gobblers of aviation fuel, that their consumption rate is a whirlwind 1,000 gallons an hour per engine - so the big jets use 4,000 gallons an hour. Airfares on domestic flights have tripled in the last six years.

Odd that there's been no general protest. Same with the preposterous rise in real estate. A landlord I know had to communicate to a long time renter of, admittedly a large apartment, that his rent was about to go up by seven times.

He threw up his hands and said: "I know it's a ludicrous rent but then the stock market's ludicrous, but until the bubble bursts that's what I've got to charge - that is the market price. All my costs have gone soaring."

Well I didn't ask him I asked an economist: "What is this minute inflation theory about?"

Mr Alan Greenspan, the Chairman of the Federal Reserve Board, has been watching the market like a hawk, more than a chairman, ever on the guard against inflation, and everybody agrees that with frequent tiny increases in interest rates he has succeeded very well because inflation remains minute - around 2%.

So my question was: "How do you reconcile this steady boast about inflation being at a 30-year low with the facts about airline tickets, the price of apartments and the continuous rise in restaurant meals?"

He pointed out something I don't think many of us have taken the trouble to notice or separate out.

The official definition of inflation applies to the price at retail of all the necessities a householder buys - prices of meat, flour, bread, butter, vegetables and labour hence production costs.

But, yes, he said, there has been continuous and now soaring property inflation which means not only the cost of houses and apartments, other real estate, but also the stratospheric rise of commercial rents and restaurants'. And of course they pass it on in the price of meals which goes up and up.

You'll gather that most Americans don't go for the expert theory that oil doesn't matter any more.

The experts point to the declining or "correcting" price of industrial stocks and the fact that the high-tech stocks seem to run up a new record about every other week - but this doesn't register what is actually happening to the world of energy but it records the strong wish of high-tech buffs that that is what will happen.

In the meantime the average ordinary American is saying: "So would you like to pay my new home, eating, oil bill and please tell the gas station man there's no longer any need to spend $60 filling up my sports utility vehicle. Come off your high-tech horse, buster."

It all reminds me of a day in the long ago, one hot and sunny August morning, lying on a beach with a friend - a lawyer, a patent or patent lawyer in chemicals.

The New York Times had just published a huge piece about the trial of the first atomic explosion. The piece appeared the day after Hiroshima and for the first time we read about such mysteries as e=mc² and uranium 235 and nuclear fission.

My lawyer friend was the only human I knew who could talk knowledgeably about all these things and at one point he said: "You know five years from now I doubt we'll be driving our cars on gasoline."

"No?" I gaped, "what then?"

"Nuclear power," he said urbanely.

"Wow," I thought. That remark, that scene, took place 54 years ago. Nuclear fuel for your car and mine, for anybody, is still ruinously expensive.

Meanwhile President Clinton has sent his secretary of energy off to the Middle East to try and persuade - to beg, rather - Saudi Arabia and the others: "Please increase your oil production, please."

It's a tricky call. In truth he's saying: "I know your people will become a little poorer than they already are but after all you'll be helping America stay great and prosperous and that's the great thing isn't it?"

In the meantime while the industrial stocks wobble and dip and Chairman Greenspan says: "Yes, the rising price of oil is what can fuel inflation," the opposing smart boys remind us that in California our energy comes more and more from electrons that flow through computer chips made of sand.

I tell you what, I have an idea. Why don't the Arabs - with all the sand in the world - start their own Silicon Valley in the Sahara? Then they too can forget about oil and join the bandwagon.

Still, I'll let you know when you can tell the man to fill up your tank digitally.

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