Issue: 137
Sent: 11-11-2008 11:38:01
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Where now for the price of oil?
I can remember back before the first Gulf War when there were serious fears that oil would surge to US$40 a barrel. Some time later I wrote a piece that revealed analysis predicting US$100 a barrel. At the time it seemed far fetched and totally outrageous. But, following the second Gulf War, as we approached US$100 a barrel, we started to think oil was getting cheaper again. That is because we approached US$100 from above (i.e. on the way down). But, an oil price per barrel that is in three figures may well be something we have to start getting used to.
This is how I start a new three part series appearing in the ATC Monthly Digest entitled "The Oil Crunch Yet To Come". The series is based upon a special research report from Chatham House, home of the Royal Institute of International Affairs and a world-leading source of independent analysis and was written by Professor Paul Stevens, an oil consultant and formerly Professor of Petroleum Policy and Economics at the Centre for Energy, Petroleum and Mineral Law.
The series starts with comparing the current situation with previous oil crunches illustrating a number of comparisons and highlighting some significant differences. In terms of similarities it notes that:
Prices reach high levels and are expected to go higher
Both periods were characterized by high crude oil prices. However the prices reached during the current price surge exceed those achieved in the 1970s.
Causes of price increases
Since the late 1960s, the international oil companies have slowed their investment in Middle East producing countries.
Security of supply as an issue
During the 1970s, security of supply became a major issue for the first time.
'Resource nationalism'
Both periods saw a strong growth of 'resource nationalism'.
In terms of differences, Steven pointed out that:
So far there had been no recession, but ....
After the first and second oil shocks, the world experienced deep economic recessions. Currently it is debatable whether there has been (or is) a recession, although the sub prime crisis and the resultant credit crunch have not helped.
Price increases today are less dramatic than in the 1970s
Whilst the oil price rises in 1974 and 1979 were serious shocks, the price increases since 2003 have been far more gradual.
The nature of oil demand and oil supply
In the 1970s, oil was not only critical for the transport sector, it also played a major role in infrastructure; today the situation is very different.
Environmental concerns are now major drivers of energy policy
In the 1970s, environmental concerns were only in their infancy and had little effect on policy in the consuming countries. The situation today could hardly be more different.
Changes in 'ideology' affecting government policy and investment
Unlike in earlier periods, in the current situation there has not yet been any significant government intervention to reduce demand or increase supply.
The second article in the series looks at where the oil come from to meet future demand and examines the prospect of future investment from several perspectives:
Expectations
Conventional thinking forecasts an increase in oil demand from its current 81.5 million barrels a day to closer to 120 million barrels a day by 2030. The report questions the logic behind these forecasts.
Willingness
The report considers the willingness of both the international and national oil companies to meet future demand and draws what many will consider surprising conclusions.
Ability
Stevens then looks at the ability of the international and national oil companies to actually meet the forecast demand. Once again, the conclusions may surprise many.
The third and final part of the series looks at the implications of the analysis. The series obviously goes into much more detail on these points, explaining the rationale for each of the conclusions. Suffice to say, all is not rosy on the oil front so that more fuel efficient car may actually be a good investment.
"The Oil Crunch Yet To Come" series is currently in the ATC Monthly Digest.
Finally, having spent several weeks back in the UK, I have added to my blog, reflecting on differences between the US, the UK and Australia. The blog is available at
http://brock-expatblues.blogspot.com/
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