PRICE SIGNALS OR CHEAP
OIL NOISE?
Andrew McKillop
Founder
member, Asian Chapter, Internatl Assocn of Energy Economists
Former
Expert-Policy and programming, Divn A-Policy, DGXVII-Energy, European
Commission
The US economy attained it highest-ever postwar growth of real GDP,
achieving what today would be the unthinkable and impossible rate of 7.5%, in
the Reagan re-election year of 1984. At the time, in dollars of 2003 corrected
for inflation and purchasing power parity, the oil price range for daily traded
volume crudes was $57-$65/barrel. Despite this simple fact of economic history,
Cheap Oil is still regarded by uninformed, sectarian opinion as a passport to
economic growth.
Media and political comment would have us believe that regime change in the Mid East, initially
in Iraq, will in time ‘free up’ and produce abundant supplies, but for the
moment there is little avail and remedy on the supply side to immediately force
down oil prices. Higher and much less volatile oil and energy prices underlying
serious and committed energy conservation, transition to renewable energy and
restructuring for a low energy economy, habitat and society are the real
long-term solutions but these are discarded or rejected as utopian and
unworkable by political decision makers. While claims are ritually made of
today’s economy being ‘less oil dependent than in the 1970s’ actual oil
consumption, and oil import dependence as a percentage of consumption in a
large number of OECD economies has risen by 25% to 50% since 1990 and continues
to rise. Oil prices, given benign neglect when they fall, and energetic
propaganda treatment when they rise have only one ‘bottom line’ in economic
policy: the lowest price is always the best.
In theory the ‘price signal’ of higher oil and energy prices must be
present if a range of goals stretching from reduced greenhouse gas
emissions through energy independence
to slowing the rate of fossil energy resource depletion are regarded seriously.
If they are not, or they are denied as being of any importance this well
explains the basic unpreparedness of large oil and gas consumer countries to
accept higher and more stable oil prices. Any large interruption in supplies,
of more than 5% or so for under 6 months, or depletion linked failure of world
production capacity to match demand and its growth would, as in the past,
create an immediate crisis.
This leaves ‘demand destruction’ as the sole option and real response to
any large rise in oil or gas prices, through economy destruction by the interest rate weapon. The last time
this was done, in 1980-83, oil prices were surely reduced through cutting
economic activity in general. Oil prices in today’s dollars fell from
$100/barrel in late 1979 to around $60/barrel in 1984, but the collateral
economic and social damage was awesome. Unlike today, however, the OECD economy
started from a position of growth, with balanced budgets in many countries
including the USA, in 1979-80. The world economy could and did take the horse
medicine of sky-high interest rates without imploding into a sequence like that
of 1929-31, but there is no certainty or guarantee this would be the case today
– no ‘soft landing’ is currently on offer.
Oil prices as high as $60/barrel would not harm the world economy, in
fact they would entrain increased growth at the ‘composite’ world economy level
within a few months, but extreme interest rates, today, would result in massive
economic damage. There would be certain collapse of world stock markets,
runaway ‘domino effect’ bankruptcy of many major finance sector corporations,
mass layoffs and unemployment, and grave problems for financing the structural trade deficits of especially
the US and UK. The US, also facing an all-time record deficit of its public
finances ($455 billion in 2003) and around $4 billion per month costs from its
‘regime changing’ experiment in Iraq would expose itself to the risk of runaway
flight from the dollar as the interest rate weapon produced stock market and
economic rout in its wake. The declining petromoney
status of the UK pound would unlikely shield the UK economy from the sequels of
the interest rate weapon being used
as a blunt tool of energy policy, to force down oil demand. All European Union
countries, and Japan would also face severe national budget financing
difficulties, as tax revenues collapsed and spending to limit economic damage,
including unemployment compensation and bailouts for large companies spiraled
up as the crisis deepened. Financing increased state spending through borrowing
would then lock on the upward spiral
in interest rates, and itself intensify recession while maintaining
inflationary pressures.
For a number of reasons oil prices are on an erratic but upward trend
since their 1998/99 most recent low of around $10/barrel. The most recent
‘price shock’ sequence can be described from various perspectives, including
the following:
“It is useful to distinguish short-term price fluctuations from
episodic movements that sometime characterise certain longer periods of time.
The most dramatic episode occurred fairly recently and is still very alive in
people's minds: this is the 1998/ early 1999 price collapse followed by rises
which took prices to high levels throughout 2000. The WTI price (NYMEX first
month futures contract) was at $17.65 per barrel at the beginning of January
1998. It reached a low of $10.80 in late December 1998, but the lowest levels
were not hit until early February 1999 when WTI bottomed at $10.26 and Brent at
$9.70. After that date the price movement was relentlessly upward with the WTI
price ending the year at around $26.50 per barrel and peaking at $34.15 on 7
March 2000. It took 13 months of toil for the market to bring the price down by
slightly less than $7.0 (that is by 39%) and then another 13 months of
over-excitement to raise it by almost $24.0 (that is by 233%)”. ‘Does Oil Price
Volatility Matter?”, Robert Mabro, Oxford Energy - OIES Monthly Comment,
June 2001.
Amusingly enough Mabro and other commentators who characterise price
increases as ‘over-excitement’, and price falls as ‘toil for the market’, trace
the signal for this upward price movement to a late-1997 decision by OPEC to raise output quotas by 10%. This in turn
isolates a key element of oil market mythology – the fixed belief that OPEC has
always got spare capacity, and will always have spare capacity. For OPEC as
currently constituted (including Iraq), and for the next 3 – 5 years no sane
analyst can go above 31 – 32 Million barrels/day (Mbd) of exportable capacity,
over and above domestic economy oil consumption needs. Speculation on this
export capacity number is of course a prime subject of ‘OPEC watching’, but
many unbiased observers suggest the real maximum export capacity of OPEC today,
and for the next 3 – 5 years will have real difficulty exceeding 28 – 30 Mbd.
More important, and with very few but key exceptions, exportable surpluses of
current OPEC producers can only stagnate or diminish. The ‘key exceptions’ of
course include Saudi Arabia and Iraq (with perhaps Abu Dhabi, Kuwait and
possibly Nigeria) in the OPEC group, and essentially the Russian Federation
alone in the non-OPEC group of oil producers with large exportable surpluses
that can, could or might be increased.
Oil market price setting as Mabro and other commentators point out is
through trading expectations, not
facts. These expectations, in other words market mythology has it that there
can only be slow, gradual and predictable rises in world oil demand, with
supply from OPEC and non-OPEC ‘players’ always tending to increase above market
demand. By consequence, prices ‘spike’ from time to time, when demand very
temporarily outstrips supply, but always return to very opaquely defined
‘normal trading levels’. For about 13 years through 1986-99 these were set at
‘around $18-per-barrel’. Quite how this price was first arrived at and then
fixed is at least as opaque and mysterious as oil prices attaining $100/barrel
in dollars of 2003 during the Iranian Revolution, in 1979-80, but may relate to
very cheap natural gas prices, operating a downward ratchet effect on oil
prices. Cheap oil price theory embodied in the lucubrations of M A Adelman - that the ‘right price’ for oil is
$2.50-per-barrel in dollars of 1972 – has like Gresham’s Law fully displaced
any consideration of why prices should rise, on the theory side. For a few
weeks in late 1998/early 1999 the ‘right price’ of Adelman was achieved, when
prices in current dollars hovered around $10/bbl.
We can suggest this supply-led, market mythologized pricing process that
is defended by its admirers as ‘real world application of Say’s Law’ is
certainly no better than fixed or ‘fiat’ oil exporter price setting as used
before 1987, and has not so many more glorious days of trading before it. In
support of this, opening a chasm in cheap oil and cheap energy mythology we can
note the special case of US natural gas market since late 2002. The US gas
market and its price setting context is now exposed to a wealth of
disinformation seeking to hide the essential fact of depletion, the simple fact that the US is ‘drilled out’ and
is a harbinger and outrider for a depletion triggered shift to deficit
overhangs on natural gas markets in Europe, and the world. Where gas pipelines
cannot be constructed – through cost, geopolitical or time constraints - supply
to compensate localized depletion will have increasingly to switch to LNG from
exotic locations. Prices for this lifeline
gas will also be exotic relative to $2/million BTU for gas and the
$18-per-barrel oil that, in economic mythology, underpinned or perhaps flowed
from the ‘economic success’ epitomized by the Clinton Boom of 1992-2000. None
other than the absolute defender of free
market pricing, Alan Greenspan, has let it be known that US natural gas
prices may attain $7/million BTU, equivalent to $41-per-barrel oil, this
winter. Greenspan of course did not add the simple fact that overly cheap gas
for too many years inevitably ‘over downsized’ gas exploration, proving and
development effort, while encouraging consumers, including almost all new
electric power producers in the US and many other countries to use cheap gas
without a thought for tomorrow.
The BP Amoco Statistical Review of World Energy in its 2003
edition notes the ‘surprising growth’ of world energy demand since 2001 and
2002 – about 2.6% annual compared with a so-called “10-year trend rate of 1.4%
annual” . Within this trend, and according to BP Amoco, the OECD IEA and other
energy sector institutions, world oil demand’s trend or underlying average
growth rate would be about 1.3% per year. This ‘10-year trend’, for oil, gas
and latterly coal was in fact already giving way to higher yearly growth rates
by about 1995, and has little or nothing to do with oil prices.
By comparison and during the 1975-79 period, with oil prices in today’s
dollars in the $38-$55/bbl range, world oil demand growth easily averaged 4%
annual by volume. Current demand growth rates in the Asia-Pacific region, since
1992 second only to North America as an oil importer and consumer, are
generally in the 4%-6% annual range for many regional countries including China
and India. It is therefore easy to suggest the “10-year trend” of 1.4% for
commercial energy, and about 1.3% annual for oil was an aberration. In
addition, if oil prices played any role at all in setting this low growth
trend, it was through cheap oil and
gas in the 1986-99 period. The main determinant of low demand growth was
continually falling rates of economic growth in the OECD countries. Since at
latest 1995-1997 this low growth trend has given way to higher annual growth
rates, for a large number of reasons notably including faster industrial growth
outside the OECD bloc.
This in turn underlines exactly why, in late 1997 and through 1998 it
suddenly became rather important for OPEC suppliers, usually enmeshed in a
losing battle of oversupplying a relatively ‘stagnant’ market (again in market
cosmology but not in fact), to vigorously increase supply. The 10% increase
decided at the December 1997 Jakarta meeting was – several months later –
saluted by a tripling of prices, after a ‘ritual’ price crash. The real world
fact of this change in oil market mythology – the market no longer being
‘structurally oversupplied’ - is that demand
shock had started to act well before 1997. This can be appreciated by
comparing annual increases of world demand through 1995-99 with increases
through 1990-94.
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World oil demand change
by volume, % change on year before |
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Source/ BP Amoco Statistical Review of World Energy, various editions |
The almost complete lack of ‘price elasticity’ relations between oil
prices, and world oil demand can be appreciated from the fact that almost each
time oil prices tended to rise demand
increased within about 6-12 months.
This is particularly flagrant for 1999 compared with 1998: after an approximate
tripling in terms of peak-trough year prices world oil demand increased at its highest rate in nearly
a decade! Whenever prices fell during the 1990-99 period, demand growth rates
tended to fall. This again proves, if proof is needed, that world oil demand is
dependent on global economy growth and yearly changes in that growth, and is
usually unrelated and un-linked to the oil price except when very, very high
prices are attained in a very short period of time. Over the short-term, and
depending on prices attained, demand often increases
as prices rise.
This above can be better appreciated when annual price variations for
major volume traded crudes are expressed in constant 2003 US dollars, as shown
below:
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World
oil demand and oil price variations 1990-99 |
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Sources/
World oil demand volume change – BP Amoco Statistical Review, various
editions *
Oil prices – Volume crude monthly averages in current dollars from Platts
Oilgram, OPEC Bulletin. Dollar
purchasing power adjustment – California Energy Commission deflator as used
in Delphi Series of oil price forecasting models. |
World potential demand is almost unlimited
Insofar as potential demand is
concerned, any supplier (whether OPEC or not) should be joyful, or very
concerned for their forward national security when serious analysis is given to
real world oil demand structures and growth drivers. These are all, finally,
due to demographic and economic growth, to conventional technology used in the
economic process, and to the very slow progress in finding real, economic, and
effective substitutes for oil, gas or even coal.
Oil remains the economic ‘swing fuel’ par excellence, and oil price
increases – up to certain supposedly ‘extreme’ levels - always tend to increase
or restore economic growth at the world or ‘composite’ level. In addition oil shock or sudden and large price
increases, or slower acting but large price rises that ‘stick’ also change the type of growth towards more
energy-intense industrial and manufactured products, away from more services
based, lower energy activities. This ‘perverse’ factor itself increases oil
intensity of world economic output and raises the ‘oil coefficient’ or
percentage increase in oil demand for a percentage point growth of the economy.
This macroeconomic change can affect
all economies, some faster than others, during a certain time period. Wholly
unlike the stock of myths, and ‘facts’ without foundation that circulate inside
the oil market trading community these effects can be measured and have
predictive value. In brief, a regime of higher oil and energy prices will tend
to lever up world composite or global economic growth rates. This, in turn,
produces the ‘perverse result’ of firm demand for much more costly oil and gas.
Current oil demand worldwide extends down from 25.6 barrels/capita/year
(bpy) for the USA to well below 0.2 bpy in rural areas of low income developing
countries (LDCs). The world average, which fell slowly for around 15 years
through 1978-93, is about 4.5 bpy. As a pure projection, if the world’s current
6.3 Bn population consumed oil at current US per capita rates this would
generate a demand of around 445 Million barrels/day (Mbd). At the other
extreme, at 0.2 bpy world total oil demand would be telescoped to less than 3.5
Mbd. The current, real world average of 4.5 bpy is around one-third the average
for European Union countries, and more than 4 times that of India, and over 3
times that of China – which will soon become the world’s biggest industrial
economy. Annual increase of the world’s population (which is continuing to fall
as a percentage rate, and in absolute numbers) is now running at about 85
Million. At the world average of 4.5 bpy this itself generates a ‘latent’ or
potential growth in world oil demand of about 1.06 Mbd annual, assuming no
change in the energy economy, no fuel substitution, and also no economic
growth.
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Demographic rate of oil
demand, 2002 |
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Sources: population data from UN Population Information Network, Oil
demand BP Amoco Stat Review |
The following points are highly significant:
1 – If world average oil demand per capita in 2003 was the same as in
1980 (about 5.28 bpy with oil prices, in today’s dollars at up to $100/barrel),
world oil demand today would be at least 12.5
Mbd higher than it is. World demand in 2003 would run at an average of
about 91 Mbd. There is no certainty at all that world supply would or could
satisfy this demand.
2 – If we take
current average annual world consumption (4.51 bpy) the ‘demographic demand
growth rate’ of 1.06 Mbd per year is likely an incompressible minimum, except
in the event of very severe global economic recession with actual contraction
of world oil demand. Given annual loss of capacity from depletion at a minimum
of 1.25 Mbd, the total new capacity or increase of production by existing
fields needed each year is at least 2.31 Mbd, assuming virtual ‘zero economy
change-zero growth’ as being a viable and sustainable situation.
3 – Any sustained growth in the world economy, that is recovery from
recession in the OECD bloc, and/or continued fast economic growth in China,
India, Brazil, Pakistan, Iran, Turkey and other large population ‘emerging’ New
Industrial Countries (NICs), will significantly increase total annual world oil
demand growth to far above 1.06 Mbd, perhaps to its double (about 2.1 Mbd). The
current trend rate of growth is at least 2.25% annual (about 1.75 Mbd
additional demand in 2003).
4 – Given that world oil demand has increased about 12 Mbd since 1991 it
is wholly unrealistic to imagine that cumulative growth will be any less than this in the next 12 years,
except if there is worldwide economic recession, or coordinated,
legislative-backed world action for energy transition.
Any reasonably unbiased reader of the Oil & Gas Journal’s current
(2003) series treating “the depletion issue” could quickly conclude that oil
and gas depletion, as ever, is a 40-year threat, challenge or opportunity, and
therefore a subject for the Keynesian long-term. Extremely large remaining and
recoverable oil resources, would exist in so-far under-explored or even
‘ignored’ regions like the deep offshore South Atlantic region, in parts of
Russia that for various reasons would have been overlooked, and of course in
Iraq, of which the ‘real reserves’ can be almost any figure above 200 billion
barrels that the ‘expert’ cares to toss up. World total endowment would,
according to these optimists, be at least 4000 billion barrels, of which
production to date is about 900 billion barrels.
Much less is said about the ‘producibility’ of these enormous reserves,
that is the rate at which world
annual oil production can be increased before some ‘hypothetical’ maximum is
attained, of perhaps 150 Mbd by about 2038 (a 2% annual average growth rate for
34 years would bring world oil demand to 156 Mbd). Even less is said about oil prices. For the moment, most
contributors to the Oil & Gas Journal’s “depletion” series appear to
suggest, oil market traders will pursue the ‘toil’ of talking down oil prices
because supply tends to outstrip demand and cheap oil is so good for the
economy. A host of ‘expert’ opinion will always be on tap to opine this is so,
latterly using the approximate tripling of oil prices in 1998-1999 as a very
retrospective explanation for the 2000-2002 ‘dotcom-telecom’ equity price crash
on world stock markets.
The OECD IEA in its monthly oil market assessment, Oil Market Report,
for 11 July 2003 is constrained, by facts, to record that world oil demand on
an ‘all liquids’ base is running at an average of at least 78 Mbd in 2003.
Based on data in previous issues of the same Oil Market Report this
yields a yearly growth rate of at least 2.25% for summer 2003 against summer
2002. Not only is no explanation offered for what BP Amoco calls “surprising
growth” in the Introduction to the 2003 issue of its Statistical Review of
World Energy, but the IEA confidently forecasts that world oil demand will
only grow by 1.3% in 2003-2004, attaining 79.08 Mbd as the rate of average
demand by summer 2004. No explanation at all is offered as to why world oil
demand growth will now suddenly return to the “long-term trend” growth rate,
after its ‘surprising’ near doubling! The IEA, in its July 2003 report then
goes on to offer the perspective of non-OPEC suppliers increasing their market
offer by up to 1.7 Mbd in the next 12 months, leading to OPEC suppliers losing
market share for a fifth successive year. The only explanation offered for the
Baghdad Bounce in world oil prices is that OPEC has decided not to increase
output, and that Iraq’s oil output is only making a “slow return” towards
prewar levels. The now dramatic decline of North Sea oil production, with the
UK and Norway losing a total of 0.516 Mbd capacity through June 2002-June 2003,
and continuing gradual loss of US production capacity (a decline of 0.285 Mbd
in the same period), while US oil demand increased at a 10-year record rate of
more than 0.5 Mbd, are of course not mentioned by the IEA as factors raising prices.
The work of Deffeyes, Youngquist and the ASPO group on real world oil
production potentials strongly suggests net additions to world production
capacity will soon fall to zero as the world arrives at its absolute peak of
production. This will, through the deforming lens of the oil market, be tested
in real time and its impact will be vastly increased price volatility, followed
by price explosion. After this, depending on the immediate economic sequels,
some form of world compact to hold oil prices in a new and much higher price
band will possibly or probably be arrived at through hastily arranged
‘North/South’ conferences like those of the 1974-81 period.
Some economists argue the highest-ever one-year growth of the US economy
in 1984 was due to equally extreme budget deficits operated by the Reagan
administration with the aim of securing Reagan’s re-election. The current Bush
administration now seeks re-election of its leader, and is pouring on deficit
financed spending but this has done little or nothing to restore or redynamise
economic growth. The very recent growth upturn in the US economy, perhaps
ironically, is attributed by analysts to stationing about 140 000 troops for
occupying Iraq, that is very classical, labour intensive, military
Keynesianism. Not coincidentally, the oil demand of foreign troops occupying
Iraq is estimated at about 0.35 Mbd, effectively raising internal or domestic
demand and constraining exportable surpluses by Iraq.
In real terms oil prices are still comfortably 60% below their level of
19 years ago. Real limiting factors on faster economic growth in most OECD
countries do not include higher priced oil and gas, and do include the sequels
of a long period in which economic growth has declined on a regular base, high
levels of personal debt, fears of job losses, terrorism, climate change and
other worries in what are essentially consumption
saturated economies. There are ever fewer possible strategies for restoring
conventional economic growth. Lower interest rates at this time, and apart from
symbolic playacting with quarter-point cuts, can be discarded as any kind of
rational, or even possible strategy for the simple reason that US, European and
Japanese base rates are at historic lows.
Most OECD countries, in 2003, have their lowest, or close to their lowest
nominal (but not real) interest rates for 50 years! Further cuts in US interest
rates, to base rates of zero percent per
year, as suggested by Federal Reserve governor Ben Bernanke, would most
surely increase the slow but certain movement away from the dollar. In crisis
conditions, for example after stock exchange collapse, this perhaps could turn
into classic flight. Gold prices
could move up to extreme levels, oil prices in USD would likely grow strongly,
but the only sure economic results for the USA would be sharply higher US
inflation, and sharply lower US economic growth. Only restored economic growth
in the US economy, in final analysis, can underpin the US dollar.
Higher oil prices operate to stimulate
first the world economy, outside the OECD countries, and then lead to increased
growth inside the OECD. This is through the income or revenue effect on oil exporter countries, and then on metals,
minerals and agro-commodity exporter countries, most of them Low Income (GNP
per capita below $400/year). Almost all such countries have very high marginal
propensity to consume. That is any increase in revenues, due to prices of their
export products increasing in line with the oil price, is very rapidly spent,
on purchasing manufactured goods and services of all kinds. In the 1973-81
period, in which oil price rises before inflation were of 405%, the New
Industrial Countries of that period – notably Taiwan, South Korea and Singapore
– experienced very large and rapid increases in demand for their exports. These
three countries increased their oil imports in under 8 years through the
1973-81 period, and despite the 405% price rise, by 60% to 80% in volume terms.
This macroeconomic mechanism of higher revenues for fast spending poorer
countries quickly levering up world economic growth (the very simplest type of
Keynesianism, but at the global level) is easily triggered by rising oil and real
resource prices, and flatly contradicts the arguments by authorized 'experts'
who opine that higher oil prices ‘hurt poorer countries the most’. Higher
revenue earnings for many low income oil exporter countries, and also for the
special case of Saudi Arabia may be the only short-term way to stop these
countries falling into civil strife, insurrection or ethnic war.
No immediate and instant recession can occur with oil at $50 or $60 per
barrel. Vastly higher oil prices than that would be needed to abort the
worldwide mechanism of higher oil, energy and real resource prices driving
faster economic growth. Conversely, low oil and energy prices entraining low
real resources prices, combined with rising population numbers surely aggravate
the ‘cycle of poverty’ in low income commodity exporter countries. Deprived of
sufficient revenues, such countries have become ‘basket case’ indebted
countries, subjected to draconian conditions by the Club of Paris, World Bank
and IMF for debt refinancing and restructuring. Constant ethnic and civil war
in Africa provides the best and most real example of what happens to countries
subjected to so called ‘structural adjustment’. When or if this concerns oil
exporter countries there can be no surprise if this reduces or eliminates
exports by the affected countries which, after the ‘price taker’ stage fall
into the bottomless pit of basket case low performer economies. When they fall
from that into civil and ethnic war their capacity to supply oil also takes a
hit.
Today’s New Industrial countries (NICs) include China, India, Pakistan
and Brazil. All have either big or immense internal or domestic markets, and
large potentials for military Keynesian
spending, that is safeguarding national economic growth through deficit financed
and labor intensive modernization and expansion of their military systems. The
relative lack of integration of these behemoth
economies in the world system, particularly India and Pakistan, also
provides them with some cover or shelter from the effects of world recession,
when or if the OECD countries tilt to all-out recession. Conversely, whenever
any increase in world solvent demand for manufactured goods occurs, these
countries will rapidly increase output. China is now and without question the
world’s leading industrial power for medium- and low-value consumer
manufactured goods and will soon become the world’s single biggest industrial
economy. Under almost any hypothesis, therefore, fossil energy demand –
particularly oil – will increase in China and India, and in the other large
population NICs. Demand growth can only run at rates close to, or above their
rate of economic growth.
The absolute peak of world production
may perhaps be no more than 84-87 Mbd on an all liquids base, and very far
indeed from US EIA and OECD IEA prognostications of up to “115 Mbd by 2020”.
Maximum net production increase, after replacement of production
capacity lost through depletion impacts, through the 2003-2010 period, may not
be able to exceed an annual average above 1 - 1.25 Mbd. Current world demand is
on an underlying growth track of about 2.25% annual, or around 1.75 Mbd
increase for the next 12 months.
This
situation, logically, should entrain very large or nearly unlimited increases
of oil prices within a period of no more than 2 – 3 years. Whether there is military adventure in Iraq, or
elsewhere, this will have little real impact on emerging and structural supply deficit on world oil markets. The
role of, and scope for utilisation of ‘strategic’ petroleum reserves (SPR) will
also tend to become ever more symbolic, since the constitution of these
reserves always increases total demand
and, after utilisation, the reserve must be restocked with oil at a cheaper
daily market price. If prices have moved higher, the additional world demand
due to SPR building or restocking will increase
demand pressure on prices. At the present time not only the US, but also China
and India are constituting or increasing their SPR with inevitable, additional
impacts on world demand. The military occupation of Iraq, we can note, is
estimated to need about 0.35 Mbd for the support of troops and logistics, thus
sharply increasing total domestic oil needs of Iraq.
Large oil price increases can likely result in significant falls in OECD
demand, within periods extending from 3 – 6 months but this is not at all the
case in non-OECD economies. Taking current world regional per capita oil
consumption rates, and economic output per barrel or barrel equivalent of
commercial energy, the effectively price
elastic OECD North, and price
inelastic NICs and LICs present almost totally different ‘profiles’ under
oil shock conditions.
The bottom line is that relatively large and rapid falls in oil demand
in the OECD North, and sustained demand increase by NICs and LICs can be
expected whenever oil prices break through the current, artificially low range
of no more than $30-$35/bbl in 2003 dollars. On a composite base, and depending
on exactly how far oil prices rise, net world demand can likely increase when or if oil prices rise to
levels extending up to $60-per-barrel or perhaps more.
· For various economic doctrinal and economic mythical
‘reasons’ Cheap Oil is seen by the decision-making elite in the richer nations
as the ‘passport to economic growth’. This is a pure fantasy.
· Since about 1995 ‘demand shock’ has begun to operate
in the world economy for a number of reasons, leading to considerably higher
underlying growth rates of world oil demand.
· Cheap oil and energy underpin the service oriented
‘globalized’ economy which drives the urban-industrial reference format, model
and framework for economic development and social progress anyplace in the
world. This in turn is a powerful motor for continued and strong demand growth
for fossil energy, worldwide. Upward potential for personal consumption of
fossil fuels is essentially unlimited in this context.
· Physical depletion is either rejected or ignored as a
price setting factor for oil and gas. Concerning oil there is mounting evidence
that net additional production capacity is decreasing every year and may soon
fall below the product of new capacity demand + annual lost capacity. By 2008
the world oil market may enter a situation of structural supply deficit. Before
that period demand growth, and loss of capacity through accidents, stoppages or
sabotage may produce recurring price ‘spikes’. In the case of conventional or
classic economic growth, this will be enabled and facilitated at the world or
‘composite’ level by rising oil prices up to high price levels, probably above
$60/barrel in today’s dollars.
· Also because of depletion, but in addition because of
environment and climate limits, energy transition away from fossil fuels must and
will happen. Price signals, in the existing economic system and framework, are
needed if this is to start, and to build from the immediate near term. Existing
and developing frameworks provide by the Kyoto Treaty offer some potential for
adaptation and direction to the task and goals of energy transition.