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Global Trends by Martin Khor

Monday 23 August 2004


PRICE HIKE EXPOSES OUR OVER-RELIANCE ON OIL

Blurb:    Last week the world oil price crossed US$49 a barrel and this week it may hit $50.   Though this is usually blamed on political uncertainties in some producing countries, there are underlying factors such as rising demand and falling reserves that suggest that the era of cheap oil, or even oil itself, may be ending.

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The world price of oil will likely hit the psychological level of US$50 per barrel soon, probably this week.  This may herald a new awareness of how vulnerable is the world on oil supplies.

Although uncertain political conditions have contributed to the recent rapid rise in oil prices, there are also structural factors that could make the high price levels more permanent.  Some analysts are already talking about the coming end of the oil era.

Earlier last week, crude oil prices crossed US$48.  On Friday US light crude oil for September delivery hit the record level of $49.27.

It is a foregone conclusion the $50 level will be breached very soon, and experts are talking about the possibility of $60 a barrel.

It used to be easy to blame OPEC (the organization of petroleum exporting countries) for the hike in price.  But OPEC countries have themselves said that the present price rise is a “big problem”, and they have increased their output to try and meet demand.

The unstable political situation in major producing countries, Iraq and Venezuela, has also been held responsible.   So too the political and legal problems which have befallen Russia’s biggest oil company, Yukos.

These uncertainties regarding supply have boosted the price. 

However, an underlying reason is the rapid increase in demand for oil, caused by economic growth in several countries and the continued high-energy consumption patterns in the developed countries.

For the first time, the world is now using over 80 million barrels a day of oil.  But even this figure will be dwarfed in a few years, if the current rate and nature of growth continues.

Paul Roberts in his recent book, The End of Oil, has detailed how oil consumption has been increasing even as reserves are falling.

There is significant growth in oil use in developing countries, many of which are having a motorcar boom.  Recent years saw China creating an auto industry, and cars are displacing the bicycle, at least in cities.

The plan was for China to produce a million cars by 2000 and 3.5 million by 2010.  This, together with the breathtakingly high rates of economic growth overall have boosted China’s demand for oil.

In India, car ownership has tripled in the last decade and is expected to more than triple again by 2020, which will increase fuel for transport fourfold and require an import of 3.5 million barrels of oil daily, says Roberts.

Demand for oil by developing countries is expected to rise from 25 million barrels a day in 2003 to 67 million in 2020.

But it is still in the rich countries, with it lavish lifestyle, that much of the world’s oil and energy is used.

Encouraged by low oil prices at the pump, American consumers have been buying big cars and SUVs (sport-utility vehicles and pickup trucks), which are heavy oil guzzlers, according to Roberts.

The fuel economy of the average new vehicle in the US is now less than 21 miles per gallon, the lowest fuel-efficiency level since 1988.  The average fuel economy would be higher by a third if the 2003 vehicle fleet had the same average performance and weight distribution as vehicles made in 1981, according to the US Environmental Protection Agency.

In the next two decades, global energy use is expected to grow by 1.5 to 2.5 per cent a year, says Roberts.  A rate of 2.5 per cent means that demand for oil and energy will double by 2032.

At the same time, production has declined in major Western areas including Alaska, Western Basin of Canada, and Britain’s North Sea.    Mexico could reach its production peak in 2005, Norway in 2004, and Russia by 2015. 

This, says Roberts, will make world oil supply increasingly dependent on OPEC, which could raise its share of world oil supply from 28 per cent now to 40 per cent in 2010.  

That’s a big worry for the West.  “The picture for long-term oil is not encouraging,” concludes Roberts.  “Even if you don’t subscribe to the fear that oil will run out tomorrow, it is clearly going to become riskier by the year, technically, geologically, environmentally, economically and politically.

“Yet thus far governments and the populations that elect them seem to be in a state of denial about petroleum…The real question is not whether oil will run out (it will) but whether we have the capacity, political will to see that outcome soon enough to prepare ourselves for it.”

Meanwhile, the geopolitics of oil has had a hand in driving many of the conflicts of recent years.   Many believe that the invasion and occupation of Iraq were motivated more by the desire to control Iraqi oil than to liberate Iraqis or to get rid of weapons of mass destruction (there were none).

There is suspicion that the great interest shown by Western countries in the situation in Dhafur, Sudan may partly be motivated by oil.

A recent article in The Guardian, London, by John Laughland highlights the huge untapped oil reserves in southern Sudan and southern Darfur. “As oil pipelines continue to be blown up in Iraq, the west not only has a clear motive for establishing control over alternative sources of energy, it has also officially adopted the policy that our armies should be used to do precisely this,” he says.

What needs to be done?   As oil scarcity becomes more real, measures should be taken in each country to cut the current high wastage of energy, and be more energy efficient.

Alternative sources of energy, which are renewable and environmentally friendly, should be phased in as soon as possible.

Though these above strategies have been talked about for years, few countries have acted on them.

One reason is that the price of oil has remained so low.  In fact, even at US$49 a barrel, the oil price is still low, when adjusted for inflation and for the rise in price of other products.

Thus, the recent increase in oil prices, though it will have many negative effects on consumers’ purchasing power, and on production and operating costs, at least serve the positive function of signaling that now is the time to begin energy-saving and energy-conserving measures.

 


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