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Cheap oil now, high costs later

IN THE short run, it is good news that the price of a barrel of crude oil has fallen below US$40 (S$69). In the long run, however, this is not good news. In fact, it may be terrible news.

Cheap oil, of course, is always pleasant to have. According to a joint study by the International Energy Agency (IEA) and the secretariat of the Organisation for Economic Cooperation and Development (OECD), a sustained US$10 increase in the price of a barrel of oil, from US$25 to US$35, would shave at least 0.5 per cent from global gross domestic product growth. That would not cripple the global economy, but it might encourage energy efficiency.

And that is precisely what Saudi Arabia and other oil-producing countries don't want to see happen. Contrary to the supposition that Organisation of Petroleum Exporting Countries (Opec) countries prefer high oil prices because they give them windfall profits, the truth is they would rather have prices ranging between US$22 and US$28 per barrel indefinitely, and keep the world hooked on oil.

The Saudis have been frank about this. 'We've got almost 30 per cent of the world's oil,' Mr Abel al-Jubeir, the foreign policy adviser to the Saudi Crown Prince, noted recently. 'For us, the objective is to assure that oil remains an economically competitive source of energy. Oil prices that are too high reduce demand growth for oil and encourage the development of alternative energy sources.'

These are smart drug dealers. The fools are the dope addicts - we, the consumers of oil.

The dealers remember what happened the last time they got too greedy. OECD countries became more energy-efficient after the 1973 oil crisis. Even the energy-profligate United States now uses half as much oil per unit of output as it did 30 years ago.

But as US Federal Reserve chairman Alan Greenspan noted last month, most of these gains in energy efficiency occurred before 1985, 'within a few years of the peak in the real price of oil' in 1980. Once the crisis passed, Western governments reduced their spending on renewable energy research, which fell by two-thirds between 1980 and 2001, according to the IEA. That is a little like a drug addict checking himself out of rehab, just as he is recovering from the shivers, because the drug dealer turns up at the door, offering to reduce the price of dope.

In the past 20 years, the dealers have become smarter and the addicts more stupid. US$40 per barrel of crude is too expensive, we scream. It will cripple the global economy, jeopardise poor President George W. Bush's re-election and dislocate developing economies. The Saudis dutifully oblige by offering to pump more oil, persuading their fellow Opec dealers to increase quotas, and bringing on line new oil fields that will enable them to pump higher volumes of oil within months.

Their game plan is simple: Persuade the world that Saudi Arabia is the global 'central bank of oil, the guarantor of supplies as a last resort', as Mr Ronald E. Minsk, an energy expert who served in the Clinton administration, put it. Moral hazard doesn't worry this bank. In fact, it thrives on it. The more hazard for us, the less for it. The question is: Should we trust this arrangement? There are at least three reasons why we shouldn't.

  • The Middle East has about two-thirds of the world's proven reserves of conventional crude. Because of increased production from elsewhere, Opec's share of the world's oil supply fell from 55 per cent in 1973 to 30 per cent now. But as non-Opec production peaks and declines in the next 20 years, the world will find itself depending again on the Middle East for between half and two-thirds of its oil supply, according to the US Energy Information Administration.

    What sense does it make to depend so much on so volatile a region of the world? Is there the slightest chance that Islamic radicalism will disappear within the next 20 years? Who, besides Mr Bush, believes the region can be converted to Jeffersonian democracy in that period?

    As long as oil-rich Arabs are saved the trouble of using their brains to make a living, it is a near certainty there will be plenty of excess space left in their brains for the murderous idiocies of religious fantasy.

  • Global energy demand will continue to rise inexorably over the next 20 years. According to Japan's Institute of Energy Economics, electricity use in Asia alone will double by 2020, and its consumption of oil will rise to 35 million barrels a day from the present 19 million barrels per day.

    The experts differ on how long, and how easily, the world can sustain such demand. According to an excellent story in the last issue of National Geographic, some experts estimate the world's oil production will peak as early as 2016, while others predict 2040.

    The most optimistic estimate, the 2000 US Geological Survey, concluded the world had 50 per cent more oil left than the pessimists believed. But the survey's leader noted nevertheless that even the larger reserves he envisioned can't sustain demand indefinitely, saying there will be 'a concern in the next couple of decades'.

    New technology, of course, may make it possible to tap unconventional sources, like in the tar sands of Alberta, Canada, believed to hold 1.6 trillion barrels of oil, well in excess of the world's known reserve of crude. Extracting this will be more expensive than pumping Saudi oil, but doable.

  • The cost of oil, however, goes beyond the price of its extraction. There is also the environmental cost of burning fossil fuels. With China set to have 120 million cars tootling down its highways by 2020, and India too set to join the race, global warming can only get worse.

    The Day After Tomorrow, a recently-released disaster movie predicting the sudden onset of a new Ice Age in the northern hemisphere, may have been bad science but it was on the money in its prognosis: The world is indeed careening towards disaster. If paying US$40 for a barrel of oil helps deflect the disaster, we would have got a bargain.

    Copyright @ 2004 Singapore Press Holdings. All rights reserved.

  • Editorial Notes: There are of course preditions for global oil peak earlier than 2016, see www.peakoil.net

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