At the boundaries of capacity
The price of ‘black gold’ climbs to new record heights, and $55 a barrel may not even be the upper limit. People aren’t getting too excited. So far anyway. Alan Greenspan sounded a little worried. If oil becomes as expensive as the 70’s the world economy will suffer. The price of oil would have to increase to $80 a barrel, in order to correspond to the maximum level reached in the 70’s, once adjusted for inflation, and have a similar negative effect on the world economy. The international energy agency is cautiously optimistic, believing it already recognises indications of a sinking demand for oil.
But we shouldn’t fool ourselves. The present crude oil price will have an inevitable lasting effect on market conditions. A higher oil price always affects national economies with a delay of 18 months. It is significant that the effect can not be predicted as the dimension of the current oil crises is unknown. Oil is a finite resource. There is constant debate among experts over the correct range of global reserves. Geologists forecast a rapidly declining production curve, which will start taking effect soon. On the other hand the oil industry has boundless optimism and promises an ‘El Dorado’ that will flower for many decades.
The earth may contain an inexhaustible supply of the ‘juice’ on which our civilisation is based. But shale oil and tar sands are very expensive to process. Alternative oil sources are only feasible if the price of oil remains high. Industry and motorists are already complaining about the cost of fuel as it is.
The world’s demand for oil increased even more as China became the second largest oil importer over a short time. Demand from China and India is one of the main causes for the recent price increases. During the 70’s the first world was worried about interruptions from the Gulf. No one worried at the time about low pumping capacity or exhausted oil fields. Today there are difficulties even supplying oil at a the upper limits of capacity.
Even the position of Saudi Arabia has changed. Previously they were the only country with significant spare capacity; if necessary, they were able to ‘open the cocks’. 12 months ago, they had spare capacity of 4 to 5 million barrels per day. Today they hardly have any meet demand; they have only 1 to 1.5 million barrels of spare capacity- too little to substitute Saudi oil, should the world supply be decreased by strikes in Venezuela, hurricanes in the Gulf of Mexcico, ethnic conflicts in Nigeria or terrorist attacks on Iraqi pipelines.
Some optimists hope that the Kyoto agreement, which Russia has now ratified, will mean that the demand for fossil fuels will decrease. This now seems more than questionable. Kyoto requires a reduction in greenhouse gasses, however only from the industrialised countires of the west, not the new giants in Asia. It should not be expected that the European governments will pay for expensive oil and also bear the costs of enhanced emission controls or expensive trade in emission credits, which Russia is hoping for.
A further negative factor is the geology of oil, which complicates the situation. The lion’s share of the reserves are in Islamic countries, from Kazakhstan to the Gulf. The power of OPEC, a paper tiger, will continue to grow. The five gulf states of OPEC, Saudi Arabia, Iran, Iraq, Kuwait and the UAE, are approaching their goal of controlling the price, and raising it substantially. George W. Bush, whose relationship with the Saudis is damaged, but still good, stands less chance of being elected if oil prices remain high. We should resign ourselves to the fact that the golden times of cheap oil are coming to an end. Oil will remain expensive. Sufficient alternatives will not exist for a long time. The changeover to alternative energy sources is enormously expensive and lengthy. Pessimists say that one would already have to have begun such a transition along time ago as it would take at least 20 years. One thing is certain: adjusting to the harsh reality of expensive oil will not be without pain.
