Page 1 of 2 Be careful what you wish for
By Michael T Klare
Only yesterday, it seems, we were bemoaning the high price of oil. Under the
headline "Oil's Rapid Rise Stirs Talk of $200 a Barrel This Year", the July 7
issue of the Wall Street Journal warned that prices that high would put
"extreme strains on large sectors of the US economy". Today, oil, at around
US$40 a barrel, costs less than one-third what it did in July, and some
economists have predicted that it could fall as low as $25 a barrel in 2009.
Prices that low - and their equivalents at the gas pump - will no doubt be
viewed as a godsend by many hard-hit American consumers, even if they ensure
severe economic hardship in oil-producing countries like Nigeria, Russia, Iran,
Kuwait and Venezuela that depend on energy exports for a large share of their
national income. Here, however, is a simple but crucial reality to keep in
mind: No matter how much it costs, whether it's rising or falling, oil has a
profound impact on the world we inhabit - and this will be no less true in 2009
than in 2008.
The main reason? In good times and bad, oil will continue to supply the largest
share of the world's energy supply. For all the talk of alternatives, petroleum
will remain the number one source of energy for at least the next several
decades. According to December 2008 projections from the US Department of
Energy (DoE), petroleum products will still make up 38% of America's total
energy supply in 2015; natural gas and coal only 23% each. Oil's overall share
is expected to decline slightly as biofuels (and other alternatives) take on a
larger percentage of the total, but even in 2030 - the furthest the DoE is
currently willing to project - it will still remain the dominant fuel.
A similar pattern holds for the planet as a whole. Although biofuels and other
renewable sources of energy are expected to play a growing role in the global
energy equation, don't expect oil to be anything but the world's leading source
of fuel for decades to come.
Keep your eye on the politics of oil and you'll always know a lot about what's
actually happening on this planet. Low prices, as at present, are bad for
producers, and so will hurt a number of countries that the US government
considers hostile, including Venezuela, Iran, and even that natural-gas-and-oil
giant Russia. All of them have in recent years used their soaring oil income to
finance political endeavors considered inimical to US interests. However,
dwindling prices could also shake the very foundations of oil allies like
Mexico, Nigeria, and Saudi Arabia, which could experience internal unrest as
oil revenues, and so state expenditures, decline.
No less important, diminished oil prices discourage investment in complex oil
ventures like deep-offshore drilling, as well as investment in the development
of alternatives to oil like advanced (non-food) biofuels. Perhaps most
disastrously, in a cheap oil moment, investment in non-polluting,
non-climate-altering alternatives like solar, wind, and tidal energy is also
likely to dwindle. In the longer term, what this means is that, once a global
economic recovery begins, we can expect a fresh oil price shock as future
energy options prove painfully limited.
Clearly, there is no escaping oil's influence. Yet it's hard to know just what
forms this influence will take in the year. Nevertheless, here are three
provisional observations on oil's fate - and so ours - in the year ahead.
1. The price of oil will remain low until it begins to rise again: I
know, this sounds totally inane. It's just that there's no other way to put it.
The price of oil has essentially dropped through the floor because in the past
four months demand collapsed due to the onset of a staggering global recession.
It is not likely to approach the record levels of spring and summer 2008 again
until demand picks up and/or the global oil supply is curbed dramatically. At
this point, unfortunately, no crystal ball can predict just when either of
those events will occur.
The contraction in international demand has indeed been stunning. After rising
for much of last summer, demand plunged in the early fall by several hundred
thousand barrels per day, producing a net decline for 2008 of 50,000 barrels
per day. This year, the Department of Energy projects global demand to fall by
a far more impressive 450,000 barrels per day - "the first time in three
decades that world consumption would decline in two consecutive years".
Needless to say, these declines were unexpected. Believing that international
demand would continue to grow - as had been the case in almost every year since
the last big recession of 1980 - the global oil industry steadily added to
production capacity and was gearing up for more of the same in 2009 and beyond.
Indeed, under intense pressure from the George W Bush administration, the
Saudis had indicated last June that they would gradually add to their capacity
until they reached an extra 2.5 million barrels per day.
Today, the industry is burdened with excess output and insufficient demand - a
surefire recipe for plunging oil prices. Even the December 17 decision by
members of the Organization of the Petroleum Exporting Countries (OPEC) to
reduce their collective output by 2.2 million barrels per day has failed to
lead to a significant increase in prices. (Saudi Arabia's King Abdullah said
recently that he considers $75 a barrel a "fair price" for oil.)
How long will the imbalance between demand and supply last? Until the middle of
2009, if not the end of the year, most analysts believe. Others suspect that a
true global recovery will not even get under way until 2010, or later. It all
depends on how deep and prolonged you expect the recession - or any coming
depression - to be.
A critical factor will be China's ability to absorb oil. After all, between
2002 and 2007, that country accounted for 35% of the total increase in world
oil consumption - and, according to the DoE, it is expected to claim at least
another 24% of any global increase in the coming decade. The upsurge in Chinese
consumption, combined with unremitting demand from older industrialized nations
and significant price speculation on oil futures, largely explained the
astronomical way prices were driven up until last summer. But with the Chinese
economy visibly faltering, such projections no longer seem valid. Many analysts
now predict that a sharp drop-off in Chinese demand will only accelerate the
downward journey of global energy prices. Under these conditions, an early
price turnaround appears increasingly unlikely.
2. When prices do rise again, they will rise sharply. At present, the
world enjoys the (relatively) unfamiliar prospect of a global oil-production
surplus, but there's a problematic aspect to this. As long as prices remain
low, oil companies have no incentive to invest in costly new production
ventures, which means no new capacity is being added to global inventories,
while available capacity continues to be drained. Simply put, what this means
is that, when demand begins to surge again, global output is likely to prove
inadequate. As Ed Crooks of the Financial Times has suggested, "The plunging
oil price is like a dangerously addictive painkiller: short-term relief is
being provided at a cost of serious long-term harm."
Signs of a slowdown in oil-output investment are already multiplying fast.
Saudi Arabia, for example, has announced delays in four major energy projects
in what appears to be a broad retreat from its promise to increase future
output. Among the projects being delayed are a $1.2 billion venture to restart
the historic Damman oil field, development of the 900,000 barrel per day Manifa
oil field, and construction of new refineries at Yanbu and Jubail. In each
case, the delays are being attributed to reduced international demand. "We are
going back to our partners and discussing with them the new economic
circumstances," explained Kaled al-Buraik, an official of Saudi Aramco.
In addition, most "easy oil" reservoirs have now been exhausted, which means
that virtually all remaining global reserves are going to be of the "tough oil"
variety. These require extraction technology far too costly to be profitable at
a moment when the per barrel price remains under $50. Principal among these are
exploitation of the tar sands of Canada and of deep offshore fields in the Gulf
of Mexico, the Gulf of Guinea, and waters off Brazil.
While such potential reserves undoubtedly harbor significant supplies of
petroleum, they won't return a profit until the price of oil reaches $80 or
more per barrel - nearly twice what it is fetching today. Under these
circumstances, it is hardly surprising that the oil majors are canceling or
postponing plans for new projects in Canada and these offshore locations.
"Low oil prices are very dangerous for the world economy," commented Mohamed
bin Dhaen al-Hamli, the United Arab Emirates' energy minister, at a London oil
industry conference in October. With prices dropping, he noted, "a lot of
projects that are in the pipeline are going to be reassessed."
With industry cutting back on investment, there will be less capacity to meet
rising demand when the world economy does rebound. At that time, expect the
present situation to change with predictably startling rapidity, as rising
demand suddenly finds itself chasing inadequate supply in an energy-deficit
world.
When this will occur and how high oil prices will then climb cannot, of course,
be known, but expect gas-pump shock. It's possible that the energy shock to
come will be no less fierce than the present global recession and energy price
collapse. The Department of Energy, in its most recent projections,
predicts
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