OIL ON THE BOIL
When this wave of higher oil prices subsides, is it going to the business as usual? After
the oil shocks of the 1970’s and early 1980’s, the oil prices came back to our bad old
ways.
But this time it feels different. It is true that all the attitudes that characterized previous
surges in the oil price are evident now. There is resentment against the oil companies at
their profits. There is cockiness of OPEC, with its president warning on Monday that the
price might go to US dollars 200 a barrel. And there are exhortations to conservation,
but without much follow up.
In the US in the 1980’s the legal requirement on car manufacturers to improve the fuel
consumption of their fleets merely pushed. Americans into four wheel drives exempt.
This time it is legislation and the subsidies in favor of bio-fuels in the US and Europe
that have helped force up the price of food globally.
However on the surface there is a sense of déjà vu, there are several reasons to
suspect that it really will be different this time; that though the oil price will eventually fall
back somewhat, we will never have the cheap oil again.
Never? Well never is a long time but if it is so it is good news for conservation and
indeed the planet. In the short term there may well be a shading back in the price, but
our economic structure is determined by long term prices, not short, and the present
surge seems likely to hasten us along the path to a less oil-dependent world.
Here’s why. It is that the balance of power between two old warriors, supply and
demand has irrevocably shifted. Supply as OPEC keeps reminding us, is tight. Any
disruption in supplies has therefore a disproportionate impact on the price. You can see
that in the way disruption in the North Sea and Nigeria pushed up the global price over
the weekend. About 60 percent of the world’s supply comes from the non-OPEC
producers and they are pumping at or close to their limits.
You could say that this oil is difficult to produce in politically easy places! Where as
OPEC oil is easy to produce oil in politically difficult places! As far as NOPEC is
concerned, many of the easier (cheaper) fields, such as on shore US supplies, are in
decline. The first generation of off shore fields, including the North Sea, are in decline
too.
Oil is still being found but the really big opportunities are in non-conventional sources,
such as shale oil and tar sands, and these are expensive to exploit and may carry high
environmental costs. So over the next generation, the total Nopec supplies may creep
up a bit – though not clear. OPEC oil, by contrast is in geological easier places. We
know where it is; and we also know how to get it out. Actually it is mostly in the middle
east, with a fair amount in Africa. Saudi Arabia remains the world’s largest producer.
OPEC members for understandable reasons, wish to retain control on their output,
which they do either by operating through national corporations or, when they do get
western companies in on the fact, keeping them tightly controlled. In theory it would be
easier for OPEC to increase its production than for Nope, but political realities curb the
extant to which that is likely to happen.
So supply will remain tight in the coming future. It may become very tight indeed if the
peek oil advocates are right. These are geologists who believe that the world is close to
the technical limits on what can be produced and that oil production is set to reach a
peak and then to decline in the next few years.
Tight supplies clash with the strong demand . The burgeoning demand from China for
all sources of energy have been widely recognized. China is scooping up world coal and
gas supplies too, it cannot carry on growing without relentlessly, year after year,
importing more oil.
Add in demand from India and the consumption situation is utterly different from every
previous global downturn.
US oil demand is slackening and Europe may too follow the suit. But Asian demand is
increasing very fast. China have huge foreign exchange reserves and it will pay even if
prices rise too much; in order to keep pace with the growth rate.
At some price, people will be forced to conserve more oil. That is good news. The
plunge in the oil price, particularly after the peek early 1980’s and the low price through
the 1990’s until about three years ago, undermined a lot od conservation efforts those
spikes in the price provoked. The price hit $80 a barrel in the early 1980’s, in real terms
roughly where we are now. Had that price been maintained through the following
quarter century we would be in much better shape than we are now.
–DR. NAVRAJ SINGH SANDHU, www.navraj@gmail.com