AS the finance ministers and central bank governors of the G-7 sat down to dinner in Washington on Friday night, meeting for the first time with their Chinese counterparts, the price of oil had just closed at its highest ever level, $US50.12 a barrel.
‘Oil prices remain high and are a risk,’ said a G-7 official. There was now ‘a recognition that oil was scarcer than was thought a few years ago’. These are ominous words for a G-7 official.
They even tend to corroborate the ‘alarmist’ view that the world is running out of oil and that high prices are here to stay — a structural phenomenon rather than a spike.
Indeed there has been plenty to spike them: hurricanes in the Gulf of Mexico, turmoil in Nigeria, the Yukos ruction in Russia, and Iraq. Yet the spectre of a peak in global production as early as 2006 and the irrefutable fact that demand is overwhelmingly exceeding supply, loom large. Over the past five years the oil industry has only discovered 3 billion new barrels of oil while the world has burned 27 billion barrels.
Adjusting for inflation, the price of crude peaked in the late 1970s at about $US80 a barrel amid the revolution in Iran and the emergence of OPEC.
But that was a mere oil ‘shock’. The OPEC cartel controlled supply and the markets freaked out.
Now, belatedly — and despite the brave face put on it by the US and other importing nations — there is an encroaching acceptance that the world’s oil reserves are in decline and we may have a crisis on our hands.
Crude awakening
IF this is the case, the present speculation in oil stocks is no bubble; no dotcom boom. As Australia’s premier oil and gas stock Woodside nudges $20, and even Oil Search has sprung towards $1.50, the clamour of Australian Stock Exchange announcements from the explorers is turning into a din.
Dingbat Oil: drilling results on Shippitin well. You Beaut Oil & Gas: drilling update. SFA Exploration: status report. Flipper Oil: discovery at Gasstation prospect and issue of options to directors. Oil stocks are like nickel stocks were this time last year. You might even find a dotcom promoter or two back with a backdoor listing on the mid-cycle rebound.
The brokers are showing great affection for anybody who has the faintest hope of slapping together even a half-decent oil float.
As the world burns 82 million barrels a day and demand for oil keeps growing at its annual rate of 2.5 million barrels a day, there will be no shortage of aspirational supply on the stock market.
And even if the price of oil does ease in the medium term, things do not look good. One of the junior explorers has been touting about Crude Awakening: How to Survive the Total Global Energy Crunch of 2006.
The book quotes Princeton professor Kenneth Deffeyes saying: ‘I’m predicting the smooth curve of oil production will peak on Thanksgiving 2005 … the uncertainty is only a few weeks in either direction.’
Geologists estimate the world may be sitting on 1 trillion barrels of oil in reserves. Since the outset of the Oil Age in 1859, the world has burned some 950 billion barrels. More than 50 oil producing nations have already reached their production peak (former Soviet Union 1987, Brunei 1979, Libya 1970, Iran 1974, Indonesia 1997, and the US 1971 among them).
The discoveries are getting smaller, and in the absence of a major oil discovery, the black stuff is about to get a lot more expensive as it approaches its global production peak.
First, it’s expensive to suck the stuff out of the earth and the seabed. Second, global demand is going crazy. The US accounts for 20 million of the world’s daily 82 million barrel consumption but China is tipped to import twice as much oil as the US within 15 years.
Ten years ago, China had 700,000 cars. Now there are 7 million and General Motors has just moved to double its production for the Chinese market. Then there’s steel, plastic, industrial production, burgeoning demand from India, Indonesia.
Presumably, Dick Cheney’s ultra-secretive energy taskforce would have been scrutinising this dire supply-demand nexus very closely in 2001 and early 2002.
After all, Dick told the London Petroleum Institute in a speech in 1999 when he was still chairman of the giant oil services company Halliburton: ‘Where is it going to come from (the extra 50 million barrels of oil a day the world would need by 2010)? … the Middle East with two-thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies.’
