An op-ed piece on oil (FT)
Oil anarchy cannot be avoided
By Peter Odell
Published: May 13 2004 21:20 | Last Updated: May 13 2004 21:20
At $40 a barrel, the current oil price bears little relation either to the commmodity's long-run supply price or to any expectation of a boom in demand in the near future.
On the supply side, crude oil at little more than half that price would assure availability for both the short and the long term. In the short term, more than adequate production capacity already exists or can be developed quickly, while in the long term the ratio of the world's reserves to production currently stands at a record high of almost 45 years. In the 1990s, 37 giant new fields (each with at least 500m barrels of recoverable reserves) were discovered, offering a total of almost 37bn barrels of oil - of which less than 25 per cent was located in the Middle Eastern oil provinces. Over the same period, the incremental demand for oil amounted to barely 15bn barrels and demand growth was a mere 1.12 per cent a year. The world is still running into oil rather than out of it.
Not only is oil being used more efficiently, it is also being replaced by other energy sources - notably natural gas. The prospects for any significant resurgence in global oil use are remote, as zero or even negative growth rates among developed countries offset continuing increases in oil use by the Organisation of Petroleum Exporting Countries and by China and India. That is why analysts are wide of the mark when they "explain" high oil prices as a consequence of rising demand in a world of actual or prospective oil scarcity. Even so, when production, refining and marketing are temporarily interrupted, massive speculation on forward markets greatly exacerbates the volatility of traded-oil prices and the headlines appear to suggest an imminent crisis.
The underlying explanation for the current high barrel price lies in the aftermath of the 1997-98 oil market collapse. That posed a threat not only to the economies of Opec members but also to the political and economic stability of Russia and to much of America's own upstream oil industry.
The US had to intervene. It did so by successfully "buying off" the propensity of Opec's top three producers - Saudi Arabia, Iran and Venezuela - to expand their output and market share. By exercising its hegemony over the oil system, the US encouraged support for the price of between $22 and $28 a barrel that Opec wanted.
This development was widely welcomed. Joint - albeit surreptitious - monitoring of supply/demand relationships by Opec and the International Energy Agency quickly and effectively re-established market stability within the preferred price range. It was the first time these two previously antagonistic organisations had co-operated.
But subsequent political events, notably the attacks of September 11 2001 and Washington's decision to invade Afghanistan and then Iraq, have destroyed the basis for the accord. The near-elimination of Iraq's 2m barrels per day of oil exports is one reason. More important, however, has been the undermining of the powerful relationship between Saudi Arabia and America, following the emergence of Saudi citizens' involvement in the terrorist attacks of September 11 and the later exclusion of US companies from contracts to develop Saudi Arabia's large gas reserves.
Order has been replaced by disagreement and the open exchange of insults between Opec and the IEA over their claims on supply and demand. It is the inevitable confusion in a disorganised market that has led to the recent speculative boom in prices. But this boom will almost inevitably be followed by collapse, meaning that the oil price is likely to range between $10 and $50 a barrel over the rest of the decade.
We can ill-afford such anarchy in the market. But, except in the increasingly unlikely event of renewed US-Saudi co-operation, excessive price volatility and accompanying problems with security of oil supplies and oil markets seem unavoidable. One of the consequences will be a continued and accelerated decline in oil's contribution to world energy demand from the current level of 37 per cent. This is likely to generate severe problems for oil exporting countries.
One opportunity to ward off such danger comes next week at the first plenary meeting of the International Energy Forum for energy producing and consuming countries since the establishment of its permanent secretariat in Riyadh earlier this year. The meeting could conceivably generate some acceptable ideas about how to steady the oil market at a price of between $25 and $32 per barrel - but do not bet on it.
The writer is professor emeritus of international energy studies at Erasmus University, Rotterdam