Oil price: Sky is the limit?

Posted in Energy Security , Other | 13-May-08 | Author: Ioannis Michaletos

The most recent developments concerning the alarming oil price result from the statements of politicians such as the Algerian energy Minister who claimed on the 29th of April that a 200 USD price could be reasonable within the coming months. The statement was made in the largest Algerian newspaper, the “El Moudjahid” and the remarkable was that according to the Minister “Even an increase in production by OPEC would not decrease prices since there is balance between supply and demand and the benzene reserves in the USA have reached the highest level of the past 5 years”. Moreover “A 1% devaluation consequents in a 4 Dollar increase in the price of oil”. The problems facing the American economy are the main factors concerning the rising oil price.

Of course as it can be understood the significance of this statement is that it stems from an official source of a major oil producing state and it also correlates with a Financial Times article where it was reported that “USA Congressmen sent a letter to the President blaming Saudi Arabia for a 2 million barrel decrease in production over the past three years”. Should the allegations prove to be correct, then that might constitute a wider plan by OPEC to increase prices. The question that could be risen, is what has the consumer countries done in order to prevent such development, bearing in mind that OPEC has 40% of world’s exports, thus making its stance a matter of crucial international importance.

Robert Samuelson, columnist in Washington Post offers yet another prism in the overall picture, by asserting that “USA meets their demands in oil by importing 60% currently compared to 42% in 1990. Moreover the world consumes 87 million barrels of oil, whilst in 1990 consumption amounted to 67 million”. Thus, the past few years the consumer countries became more influenced by OPEC than it has been assessed for, and the rise of prices is something that cannot be controlled as efficiently as it was previously.

Moreover Lehman Brothers investment bank calculates that “As much as 30% of the recent price spike is due to oil futures and options that were invested predicting increase. In total 40 billion Dollars were invested by funds since the beginning of the year, more than the whole of 2007”.

Other traditional oil producing states fail to fill the demand. Nigeria faces conflicts in the regions of its main energy production hindering its ability to increase production. Norway has witnessed a 25% decrease in oil production since 2001 as a recent New York Times article noted. Furthermore, UK has suffered by a 43% fall in production since 2000. Russia which is the second biggest oil producer in the world with an approximate 10 million barrel yearly output faces major difficulties of keeping up with this pace due to underinvestment and a similar issue combined with the lack of new fields for exploitation raises stark warning for Mexico as well.

Continuing Iraq hasn’t been able yet to produce a fraction of the output it had before the war, whilst Iran is entangled in a political turmoil of global proportions due to its nuclear program and its aspirations of becoming a regional superpower.

Finally Saudi Arabia with a 12.5 million barrel production tops the list of world producers, but it has already noted that it will not increase that in the near future. Therefore the prospect of a wider price index increase becomes a certainty, until it reaches a level where demand slows down. Of course none is quite certain what that level might be and it has to be emphasized that oil is still cheaper than alternative methods of production (Wind energy, solar), a crucial aspect of everyday life not only for the West but also in China East Asia and increasingly in India; literally more than half of the world’s populous. That is the major difference between this “Crisis” and the previous ones in 1979, or 1973. In a few words oil is more important to the globe than it was a few decades ago, because the notion of the “Consumer society” has spread to all corners of the earth.

As long as investments in oil production and exploration are not accelerating, oil price will continue to increase and it is more than certain that it will reach at least 150 USD by the mid-summer period.

The political aspect of the above would be the result of the culminations in poor and energy dependent regions in the world that will likely enter a stage of conflicts being provoked by the expansion of poverty, malnutrition and state failure. The good times as envisaged since the early1990’s are beginning to fade away and 2008 will prove to be the last annum of relative ease for many parts of the planet. A hope for the future is that the international community is experienced enough to avoid making mistakes of the previous generations and it will manage to pass yet another crisis that is common in the cyclic nature of the international trade. Time will tell though what the outcome will be, certainly “We live in interesting times” as one old Chinese saying goes.

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