Is oil price going to hit $100 a barrel?
All the various components (of the global energy crisis) came together after 9/11, and 9/11 was a major factor in bringing them together. Once we realise this, many other developments fall into place: the war on terror; the invasion of Iraq; the rise of Iran; the radicalisation of Islam and the increasing sectarian tensions within Islam; the decline in American power and influence; nuclear proliferation; Chinas pursuit of natural resources and its negative effect on curing the resource curse; and Russias use of gas supplies to suborn its former empire and the larger danger it poses for Europe. The core of the crisis is the tight supply situation for oil. So wrote George Soros, probably the worlds most influential hedge fund manger, in 2006.
Oil price has hit record levels and has been trading over $80-a-barrel level since September 13. While seasonal and speculative factors do play a role, the oil price is in a long-term upward cycle with little signs of weakness. Oil has always been a subject of great importance for the global economy and politics but what is new this time? Why the oil price has more than trebled during the last five years after hitting last decades low of $11-a-barrel during November 1998?
Could it may break all previous records and why it has come to occupy a central place in the United States foreign policy are questions that directly concern Pakistan. Hence, it is important to examine these issues in a holistic manner. Recently, the subject has received greater attention in the global media since Goldman Sachs, an American investment bank, said last July that we could be months away from $100-a-barrel oil price. On October 4, Merrill Lynch, the worlds biggest brokerage firm, raised its oil-price forecast for the fourth quarter 19 per cent because of insufficient supply from producers outside of the Organisation of Petroleum Exporting Countries (Opec). Alan Greenspan, the former US central bank head and who was once called the second most powerful man in the world, wrote in his recently released book, Iraq war is largely about oil. This hit the headlines globally, causing embarrassment to the Bush administration and reignited the debate about oils crucial role in the US foreign policy.
It is pertinent to recount some basic facts about oil. Oil meets about 40 per cent of global energy requirements but 96 per cent of its transportation energy needs. Despite the development of many alternative sources, oils share of global energy needs has only marginally declined from 46 per cent in 1980. Its global consumption has continued to outstrip the discovery of new reserves by a wide margin. While the seasonal factors can influence oil price in the short term, the long-term demand and supply factors ultimately determine price. Since 2001, the world oil consumption has been rising at faster rate of 1.7 per cent a year compared to its 27-year average of 1.4 per cent. The ratio of proven reserves to oil production (measured in terms of number of years) has declined from 41.0 in 1990 to 40.5 in 2000 to 39.5 in 2006. The world production has increased from 65.4 million barrels-a-day (mbd) in 1990 to 81.7 mbd in 2007 but the sources from which the incremental supply has come through have made it a major issue of global politics.
Middle East accounted for about 50 per cent of the increase in the oil supplies, Africa 20, Latin America 15 and Kazakhstan five per cent during 1990-2006. The oil production in the US declined from 8.9 mbd in 1990 to 6.9 mbd whereas its consumption increased from 17 to 20.6 mbd. The US accounts for about one-fourth of the global demand but its oil production has been declining since it peaked in 1970. The US accounted for 21 per cent of the increase in global oil demand during 1990-2006 but China contributed the most accounting for 30 per cent of the total. The demand-supply situation assumes a special geo political importance given that nearly 70 per cent of the increase in global oil supply in the last 17 years has come from Middle East and Africa and 63.5 per cent of the increase in demand has originated from Asia led by China, India and Korea.
The role of China has now assumed great significance in global energy security. China accounts for about nine per cent of worlds oil consumption but its consumption has grown at 7.7 per cent since 2000 - at 4.4 times the world average. Moreover, due to lack of any large discoveries in the last two decades, its oil production remains flat and its imports have doubled in the last five years to about three mbd. Chinas imports could to rise to 7-8 mbd by 2012, with a predominant dependence on Middle East imports. In anticipation, China has spent over $17 billion since 2002 on acquiring oil companies/assets in Sudan, Kazakhstan, Nigeria, Russia, Angola, Ecuador, Columbia and Argentina all outside the Middle East as part of the strategy to reduce its dependence on oil imports from the Middle East. China is fostering closer relations with Russia and Iran to meet its future natural gas needs. India competed with China (and lost) for the acquisition of above oil assets in Kazakhstan, Nigeria, Russia and Angola. Note that while China and India are making acquisitions, Pakistan is selling off its energy assets.
The situation in terms of proven reserves presents an even more interesting scenario. The table below summarises the global proven oil reserves:
While the Middle Easts reserves have increased the most in absolute terms, Iran accounts for most of increase although major fields still need to be developed. Irans natural gas reserves have also gone up 22 per cent during the last decade and it has emerged as the second largest hydrocarbon power in the world. On the contrary, Saudi reserves have not gone up. What has further compounded the tight oil supply situation is Saudis inability to increase production despite being under significant western pressure to do so. Saudi oil production declined to 10.86 mbd in 2006 from 11.11 mbd in 2005 after remaining around 10.6 mbd during 2003-2004, although Saudi American Oil Company (ARMACO) has repeatedly denied reports that raised questions about the actual level of reserves and its ability to pump more oil. In 2006, ARAMCO announced an $18 billion plan to increase capacity to 12.5 mbd by 2009 and 15 million by 2020. However, its demonstrable capacity has not increased significantly since 1980 and 1981 when it produced 10.2 mbd and has not made any significant discoveries or investments in the past two decades.
Adding to the concerns about the actual Saudi capacity to pump more oil is the question of the remaining life of the reserves outside the Middle East. At the current production rates, the remaining life of proven oil reserves of some major oil producers is as follows:
Life of remaining oil reserves: number of years
Middle East 79.5
Venezuela 77.6
Kazakhstan 76.5
Africa 32.1
Russia 22.3
China 12.1
United States 11.9
Given the growing dependence of both the US and China on oil imports and the level of reserves in Middle East and Africa, energy security has emerged as a major issue in their foreign policies and is likely to generate more tensions with Middle East as the main theatre. Nigeria, Algeria, Libya, Angola, and Sudan account for about 90 per cent of proven oil reserves in Africa and China has emerged as a serious challenger to the western oil interests in the continent.
Some oil analysts think the oil price contains a premium for security or political instability as most of worlds oil is in politically turbulent regions. That may be so but the supply situation has not been helped by low level of investments in oil exploration, which have been stagnant in both Opec and non-Opec countries since early 1980s. Investments on oil exploration as a percentage of total capital spending worldwide dropped to less than 14 from over 20 per cent in 1996. This is makes it more likely that the world is going to be supply constrained for many years to come. The result has been a highly volatile market focused on short-term shifts in inventories, weather forecasts, and relatively small changes in output in addition to the political developments. However, the spike in oil price has hardly been a surprise for experts. Former US President Bill Clinton while addressing a select gathering in Arkansas on June 21, 2006 had this to say about oil price: everybody I know who knows anything about this business believes itll be $100 a barrel in five years or less.
Pakistan meets about 50 per cent of its energy needs from its natural gas reserves that may not last more than 15 years. Hence, it has been eager to secure gas from Iran. Pakistans import bill increased from $6 billion during FY 2005-2006 to $7.4 billion in FY2006-2007 with most of the increase coming from refined petroleum products while the oil price averaged around $65-a-barrel. The oil price has averaged around $75-a-barrel since July this year and looks set to increase. This will put additional pressure on the balance of payments and fuel inflation. On the geopolitical front, Pakistans relations with China and Iran could come under more strain in the coming years as the tensions are bound to increase when China tries to secure its energy supplies and routes, the US tries to strengthen its hold in the Gulf, tightens its circle around Iran and Pakistan finds itself in the middle of what many, including Alan Greenspan, believe is not a war on terror but a war for oil with terrorism used as a smokescreen.
yousufnazar@yahoo.com
Is oil price going to hit $100 a barrel? -DAWN - Business; October 08, 2007
