by Andrew McKillop
Recent headline data from the OECD’s IEA, the US EIA, and data from leading oil analysts concerning world production and inventory stockbuild in key consumer countries, together with ‘traditional’ claims by certain analysts that OPEC is still able to ’overproduce’, is taken by some commentators as offering a prospect for oil prices sliding below current, rising price levels in the region of about 36-45 Euro/barrel (45-55 USD/bbl), perhaps by mid-2005. Optimism regarding nonOPEC supply growth is however muted at this time, with the only major upturn to counter nonOPEC production decline by its 3 largest OECD producers (USA, Norway, UK) coming in the shape of Azerbaijan-Turkey pipeline deliveries from Caspian region producers. Deliveries are slated to build to not much above, and probably less than 2.5 Million barrels/day (Mbd) from Spring 2005. World demand growth remains very strong — at about 3%/year or 2.5 Mbd per year — with exceptional growth being recorded not only in the emerging industrial superpowers of China and India, but also in East Europe, USA and West Asia.
World oil stocks, depending on country and using periodic data from the IEA, EIA and oil analysts, in fact remain well below average figures for the 2000-2003 period. Combined with recent — extreme — figures from the IEA for world oil production (well over 82 Mbd) the overall reading is that world oil markets will remain tightly supplied with generally uptrending prices, right through the period to 2010.
The base for this situation is in particular world demand growth. This ‘vintage’ growth has been consistently underestimated, now, for more than 2 years, not only by the oil majors and national economic forecasting institutions, but also by the major oil importer country agencies (IEA and EIA). These two agencies, in their periodic publications and data series, have continued to forecast slower demand growth as being likely ‘going forward’, while they publish real figures for the present day and real world that show ‘vintage’ growth in nearly all markets!
The base for this ‘surprising’ growth of world oil demand, and reason why demand is growing faster than in the 1990s is unstoppable growth of all forms of commercial energy demand by key, large population, very fast growing economies including China, India, Brazil, Pakistan, Iran and Turkey. In addition, the type and nature of economic growth at the world level, also including the older, slower-growth OECD economies, has become more oil-intensive. This is reflected in the USA (taking about 26% of world oil output) by consistent and large oil demand growth coming out of the 2001-02 recession in what has essentially been a ‘jobless recovery’. It is however in no way ‘energy lean’, reflecting technology, infrastructure, social, demographic and economic cycle changes.
Weather trends have become ever stronger, even key factors in deciding price movement — again reflecting the tightly balanced, low stock context that is generated by world demand growth trends moving ever further away from the ‘low growth paradigm’ of the early 1990s. World oil demand has moved up with higher oil prices, that themselves lead to faster economic growth through raising ‘real resource’ prices and revenues to generally low income exporters of non-energy minerals, metals and agrocommodities. Another factor tending to drag oil prices higher is strong growth of natural gas demand in several world regions, while supply flattens and then shrinks. For the two largest gas consumer regions, USA and Europe, the fast emerging picture is one of serious shortfalls in regional and national gas supplies, becoming ‘structural’ pricing factors from the very short-term future. Gas prices in the USA will certainly never return to those in the ‘Cheap Oil interval’ of 1986-99, when daily traded prices averaged around 2 USD/Million BTU (MMBTU), and oil prices held at around 18 USD — 30 USD/barrel. The emerging gas price paradigm for US consumers is now in the 7 USD — 10 USD/MMBTU range, equivalent in energy economic terms to oil at around 38 USD — 55 USD/barrel.
Gas prices in Europe are ‘traditionally’ above US and Asian prices; faster decline of European gas production (depleting at 5%-6%/year) compared with US domestic output (depletion around 2%/year) will for some while maintain or reinforce this differential. In turn, this will drive European oil prices closer to price levels in the USA, negating market proximity-transport cost differentials that tend to reduce European oil prices relative to US prices. Gas at 10 USD/MMBTU results in oil at Euro 40 or 45/barrel becoming competitive, and the emergence of these price levels will push day traders to erode residual negative price differentials against oil, effectively raising its price, in both markets.
Since late summer 2003 and for about 4 months into 2004, US economic growth was likely running at close to its record postwar rate of about 7.5%, last achieved for a whole-year (12 month) period in 1984. At the time, expressed in dollars of 2003, year average oil prices were in the region of 52 USD — 65 USD/barrel. In 2004, through June-September, as oil prices have moved up to and beyond 50 USD/bbl, the OECD and IMF have consistently uprated and revised economic growth estimates for Europe, Africa and Latin America. The IMF estimates world economic growth in 2004 will be at least 4.5%, the highest rate for over 10 years. World merchandise trade growth in late 2004 is running at about 15%/year, the highest for over 15 years. These real world, real economy data provide a direct challenge for those who regularly claim that “High oil prices hurt economic growth”.
As in 1984, faster economic growth in 2003-2004 is in no way hindered by higher oil prices, and in fact is likely accelerated by higher oil and energy prices spinning off higher prices for non-oil raw materials, agrocommodities and other ‘real resources’, and raising the purchasing power of generally low income exporter countries of ‘real resources’. In addition, higher oil and other ‘real resource’ prices, these resources being quoted and traded in US dollars, automatically levers up world liquidity, which then buoys and reinforces world solvent demand. At the same time, the emerging industrial superpowers of China and India have such generally low economy-wide oil and energy-intensity (around 1/8th to 1/15th per capita oil-intensity of the USA and EU countries) that they are easily able to absorb much higher oil and energy prices without strain to their balance of payments.
Over the last 39 years, the oil price impact on world oil demand trends is complex and variable, comparing and contrasting year-peak oil prices in constant 2003 dollars, and year average demand, together with demand trends on a 3-year base. This is shown in the Table, below
Table (1) World per capita average oil demand and oil price trends 1965-2004
|Average daily oil demand|
|Billion barrels consumed per year||Change on previous 3-year value (percent)||World per capita average (bcy) Barrels/capita per year||Year peak oil price in 2003 dollars per barrel (light volume crudes)|
|1965||3310||31.23||11.39||+ 17.2%||3.65||USD 9/bbl|
|1968||3520||39.04||14.25||+ 25.1%||4.05||USD 9/bbl|
|1971||3750||51.76||18.89||+ 11.4%||5.04||USD 15/bbl|
|1974||3980||59.39||21.68||+ 14.8 %||5.44||USD 56/bbl|
|1977||4200||63.66||23.23||+ 7.2%||5.53||USD 39/bbl|
|1980||4410||64.14||23.41||+ 0.7%||5.31||USD 82/bbl|
|1983||4650||58.05||21.18||- 9.6%||4.56||USD 59/bbl|
|1986||4890||61.76||22.54||+ 6.4%||4.60||USD 32/bbl|
|1989||5150||65.88||24.04||+ 6.6%||4.67||USD 32/bbl|
|1992||5400||66.95||24.43||+ 1.6%||4.52||USD 29/bbl|
|1995||5610||69.88||25.51||+ 4.4%||4.54||USD 25/bbl|
|1998||5870||72.92||26.62||+ 4.3%||4.51||USD 18/bbl|
|2001||6130||75.99||27.74||+ 4.2%||4.53||USD 31/bbl|
|2004||~ 6400||~ 82||~ 29.75||+ 7.5%||~ 4.67||USD ~ 55/bbl|
Population data/ UN Population Information Network
(year average or “June” population estimate)
The often repeated but unproven claim that ‘High oil prices hurt economic growth’ is also lacking the proof of its logical corollary, i.e. that “Low oil prices favor economic growth”. The fast fall in economic growth rates in all OECD countries following the ‘liberation’ of Kuwait in 1991, which most certainly helped Bill Clinton to massively defeat G. Bush-1 in the US presidential elections of 1991, was accompanied (and in fact driven) by fast falling oil and energy prices. In any case, cheap oil, in 1991, led to no spontaneous upsurge or recovery in US or other OECD country economic growth. Before this non proof of lower oil prices ‘aiding’ economic growth, the very large oil price falls of 1985-86 did not lead to faster economic growth in any major OECD country through 1986-88.
Conversely, the ‘Baghdad Bounce’ so often predicted by business and finance ‘experts’ for the US and world economy in the run-up to the US and UK invasion of Iraq in 2003 was most certainly upward — for oil prices. Economic growth rates, already at high levels in South and East Asia, were either unaffected by, or marginally increased by the economic context in which oil prices bounced upward, and continued bouncing upward as Iraq descended into chaos. From early 2004, with continuing and strong growth of the oil price, the ‘trickle down’ effect of higher oil, gas and ‘real resource’ prices began to take effect. Since early 2004 economic growth rates in most world regions, including Europe, Africa and Latin America, have been repeatedly re-estimated upwards by the European Commission, OECD and IMF. In addition and for about 4 months from late 2003, even the erratic US economy showed some signs of ‘vintage’ economic growth, before falling back to lower and more hesitant trend rates of about 3.75% to 4.5% annual in mid-2004.
It is easily possible to identify non-cheap oil as a cause of this ‘bounce’ or ‘rebound’ of world and regional economic growth trends outside the USA, and not the cause of hesitance and fragility in the special case of the US economy. At end-2003 and in the first 9 months of 2004 there is no sign, anyplace in the world, of fast falling economic growth rates. This is claimed to be ‘despite high prices’ by the vast majority of institutions and so-called ‘experts’, but it is also easy to turn this argumentation around, and suggest that economic growth has ‘rebounded’ through the impulsion of oil prices in the USD 45 — USD 55/bbl range for light grade crudes.
According to data published by the IEA, world oil production in January 2004 was running at over 81 Million barrels/day (Mbd). By mid- to late-summer 2004 IEA estimates indicated world oil demand running at around 81.75 to 82.5 Mbd. The same IEA source (the ‘Oil Market’ bulletins) indicates in previous issues that average daily demand for 2002 was well below 76.5 Mbd (in the range of 76.1-76.4 Mbd).
Growth on a 24-month basis growth (2002-2004) is therefore up to 7%, and for the 36-month period (2001-2004) growth of world oil demand will be at least 7.5%. This is the highest rate of growth for over 25 years (see Table above). We can surmise that if 2001 had not been exposed to the dotcom-telecom crash on world stock markets, and the Sept 11 terror attacks in USA, leading to a fast fall in economic growth, world oil demand growth in 2001-2004 could easily have exceeded 9%.
This underlines a central argument for oil prices continuing their upward trend since 1999: average 3-year growth rate trends held at no more than about 4%-4.5%, through the 1990s, with per capita oil consumption staying flat at close to 4.5 barrels/year, since the early 1980s. This has now changed quite dramatically. Demand growth rates have increased fast, raising per capita average oil demand, proving that “low oil demand growth — low oil prices” is in no way a ‘fixed paradigm’. This paradigm shift or change, we should note, is occurring in a real world situation of oil prices increasing while world oil demand continues to expand very fast — that is a context where higher oil prices lever up world oil demand.
A new paradigm, of rising per capita rates, as experienced in the ‘high oil price’ period (see above Table), is more than possible. This implies a sharp accentuation of ‘bottlenecks’ or persistent undersupply to an ever-tightening world oil market. It is noted, first, that world per capita average oil demand increased fastest through 1965-77, (see Table above) in spite of the first Oil Shock quadrupling crude oil prices. No ‘price elastic’ reduction in per capita demand followed from the ‘first oil shock’ of 1973-74 (295% increase in nominal dollar prices). The current context is therefore comparable: oil prices are rising, creating a context favorable to faster economic growth (especially outside the OECD). This reinforces world oil demand growth, which is outstripping population growth, resulting in recovery of world per capita average oil demand.
Going forward, three ‘new paradigms’ for annual average per capita demand can be posited, as shown in the Table, below. All of these paradigms lead only to one conclusion: sharply higher oil prices. In addition, these potential new trends rates of per capita demand and world demand growth on a 3-year base are themselves driven by a world economic context of faster economic growth arising in part from higher energy and real resource prices. Any remaining tendency for ‘loss of market share’ by OPEC members can only disappear with the type of vintage growth in world oil demand that is now under way. It is also noted that the per capita average demand figures used (4.75, 5 and 5.25 barrels/capita/year) are in no way ‘extraordinary’ numbers. In 1980, with oil prices briefly attaining USD 100/barrel in 2003 dollars, and a year-round peak value for a basket of lighter crudes around USD 80/bbl in dollars of 2003, world per capita consumption averaged about 5.3 barrels (see Table 1).
Table 2 2010 world oil demand for 2 population growth scenarios and 3 annual average per capita demand scenarios (‘Low’ and ‘High’ population growth: ‘Low’, ‘Medium’ and ‘High’ annual average per capita demand)
|AVERAGE PER CAPITA DEMAND
WORLD POPULATION 2010
Millions (year average)
YEAR TOTAL DEMAND 2010
Billion barrels (Gby)
|YEAR AVG DAILY DEMAND
Mbd in 2010
|GROWTH FROM 2002
Mbd growth (8 year growth)
|Low 4.75||6900||6800||32.3||32.8||88.5-89.8||~ 12.5 Mbd|
|Med 5||6900||6800||33.8||34.5||92.5-94.5||~ 17.0 Mbd|
|High 5.25||6900||6800||35.4||36.2||97.0-99.2||~ 21.0 Mbd|
Population growth forecast for ‘Low’ projection assumes UN forecasts of slowed annual rates of growth for the 2020-2030 period are attained by 2004-2010.
‘High’ population projection utilises current trend of world demographic growth (85 — 90 Million/year).
World average per capita oil demand figures: ‘High’ case does not exceed 1980 average (5.3 bcy)
There can be plenty of discussion as to what ‘structural’ undersupply would mean with world oil output likely to soon start trending down, from its peak that may be well below 90-92 Mbd (according to geologists and analysts such as Younquist, Deffeyes and the ASPO group). The key word for analysing price-demand relationships and the much-predicted but slow emerging ‘Gas Bridge to the future’ is soon. This paper sets out to suggest that under almost any circumstance, any hypothesis there will be a widening supply gap driven — not opposed — by rising prices. The above scenarios (Table 2) are very far from adventurous or unrealistic. Barring major catastrophe, the population projections for 2010 are likely to come about, leaving only the average per capita or demographic demand as the factor with most margin for error. Here, we can develop the supporting rationales for a likely increase in world average per capita demand, as summarised below
Non implementation of Kyoto Treaty — Other than the EU countries, Japan and Canada there is little likelihood of ratification and implementation by major oil consumer and importer countries including the USA, China, India and other emerging industrial countries. In the countries of possible or probable implementation, average per capita or ‘demographic’ oil demand is broadly in the range of 12 (Europe, Japan) to 18 barrels/capita/year (Canada). Reductions of more than 10%-15% from these very high demand rates are very unlikely within a period of less than 5 or 10 years from the start date of implementing Treaty obligations (2008-12), without strong coercion, and/or intense economic recession, and therefore have little or no impact on 2010 forecasts.
Fast growth of oil demand by new industrial powers — both gas and oil demand growth by China, India and other fast emerging industrial economies is in the range of 6%-15%+ per year (5%-9%/year for oil and 12%-18%/year for gas). Fast growing private car fleets and development of the consumer society in these countries can likely follow the pattern set through 1975-90 by the Asian Tigers, leading to tripled or quadrupled per capita oil consumption within 10-15 years, almost at any oil price. Current per capita oil demand in China and India is in the range of 1.2 — 1.5 barrels/capita/year.
Impact of higher oil prices — as shown in Table 1, above, much higher oil prices in the period 1973-80 led to no sharp fall in per capita demand. The range of demographic demand rates used in Table 2, above (4.75, 5 and 5.25 bcy) are all below the actual figures for 1975-80. The only potential for actual fall of world oil demand is through intense economic recession triggered by massive rises in interest rates in OECD countries.
As shown in Table 2, the forecasts presented here indicate a minimum increase of about 12.5 Mbd for the 8-year period of 2002 through 2010. In fact, the higher cases, with 8-year demand growth above 14 Mbd, are probably more likely in the absence of self-induced and intense economic recession, or extremely strong ‘oil-saving’ measures in the OECD countries. Rapid cuts of oil demand in OECD countries will only be available through physical rationing and related technical measures, or through indiscriminate use of the interest rate weapon, to provoke economic recession: in both cases the political and media rationale or ‘explanation’ will be “Oil Shock”. This analysis is supported by a review of previous actual growths of world oil output, oil prices, and energy policy responses over 8-year periods from 1971 to 2004.
The only 8-year periods shown in Table 1 in which oil output capacity was increased by better than 12 Mbd were all in the distant past — well before 1980. In other words, for the last 25 years, there has been no 8-year period with net increases of capacity (after covering depletion losses) more than 12 Mbd. From the end of the ‘high output growth’ period, which ended by 1980, and for about 5 years during 1978-83, world exploration-development activity achieved its highest-ever rates of spending and activity, measured by drilling and proving work. These have never been achieved again. Current trends for exploration-development are very far below this, and to date (Sept 2004) have shown little positive response to rising oil prices.
One cause is ‘wait and see’ attitudes by most major oil corporations, who have moved ‘down the barrel’ to refined products marketing and non-energy activities. Their aversion to exploration and development is reinforced by now entirely irrational ‘reference oil prices’ for long-term planning — of below USD 25/bbl (Italy’s ENI claims that USD 16/bbl is a ‘rational’ long-term reference oil price). In a context of very high exploration costs, and constantly falling field size of actual discoveries, there is only limited response to the emerging context set by oil prices well above 45 USD/bbl. World discoveries in 2003 as published by the 10-largest oil corporations were below 3.5 Billion barrels (world consumption is currently about 29.8 Bn barrels/year). Most major oil corporations claim that exploration effort will not increase until they obtain ‘easy access’ to prospective areas in the territories held by the OPEC, especially in the Middle East.
World demand growth is ‘surprising’, and is now in 3rd Quarter 2004 running at around 2.25 — 2.5 Mbd per year. As noted several times, the relation between oil prices, world economic growth and per capita or ‘demographic’ oil demand is dynamic: with a return to prices comparable to those of the ‘high price period’ (broadly above USD 55-per-barrel in current dollars), per capita demand can easily re-attain 5 bcy. At 5 bcy world oil demand will quickly exceed 89 Mbd, with annual increments of at least 2.25-2.5 Mbd (as current). Even if there is a fallback to lower annual growth rates of around 1.6%, these will still generate annual demand increments of at least 1.75 Mbd (that is around 14 Mbd in 8 years).
Overall, it is difficult on the demand side to forecast world oil demand growth through 2002-2010 as being less than 14 Mbd, barring worldwide economic recession through use of the “interest rate weapon”, and/or physical rationing in the OECD countries as a response to runaway oil prices. This demand increment will be very difficult to supply.
Taking historical average or ‘likely and reasonable’ growth trends for export surplus or ‘offer capacity’ over comparable 8-year periods, we find these range through 8 — 9.5 Mbd, since about 1975. In other words, no previous recent 8-year period has achieved growth of net supply offer, after depletion losses, of much better than about 60% of the approximate 14 Mbd growth of world demand that is forecast, here, as the likely minimum growth of world oil demand in the near term period of 2002-2010.
Taking the likely minimum or low-medium figure (14 Mbd in 8 years), this is close to 50% of OPEC’s total real export capacity in 2004. Current price rises, apart from the ‘geopolitical uncertainty premium’, are in fact and in reality driven by the incapacity of either OPEC or nonOPEC suppliers to actually and significantly raise export capacity. Oil demand growth through the 12 months 3rd Quarter 2003-3rd Quarter 2004 is running at above 2.25 Mbd (growth rate of about 3% annual).
World oil import demand, it should be noted, is increasing faster than world oil demand (about 4% annual for imports and 3% annual for world consumption) for the simple reason that the vast majority of oil producers are experiencing either stagnant or declining production, and world oil consumption is growing. This notably includes the domestic oil consumption of the producer countries, reducing their ‘net export’ or supply offer. We can note that — overall — the only nonOPEC oil producers with an export surplus of more than 1.75 Mbd are Russia, Norway and Mexico. These producers, and almost all other nonOPEC producers (with or without export surpluses) have either relatively or absolutely small reserve bases, and high or very high production/reserve (P/R) ratios. This includes UK, Syria, Denmark, Gabon, Ecuador, Argentina, Colombia, Egypt, Oman, Romania and other producers with either stagnant or falling production, and rising domestic consumption.
Only Russia in the nonOPEC exporter group has a significant potential for increasing its net exports or ‘supply offer’ through 2010. Inside OPEC, only the 3 Middle East producers of Saudi Arabia, Kuwait and UAE, and just possibly Venezuela have any major potential for increasing export offer well above their current export capacities. In volume terms, for the OPEC group, only Saudi Arabia has significant potential for increased exports, but is unlikely capable of raising exports by more than 3 Mbd through to 2010: likely demand growth to 2010 (see Table) will exceed 14 Mbd.
The non Middle East OPEC members, Nigeria, Venezuela, and Indonesia are likely unable to expand export offer at all, through to 2010, especially Indonesia. By the period 2010-12, Iran may become a net importer of crude. Indonesia will almost certainly cease to be an exporter of either crude or products by 2006 or even 2005.
The ‘bottom line’ to this is fast emerging supply shortfall to a backdrop of fast increasing dependence on Russia and Saudi Arabia — or in fact the only choice — transition to lower energy, conservation and renewables oriented, economy and society restructuring strategies. Planning for energy transition will be vital and urgent by 2008. Given the ‘laissez faire’ or New Economy doctrine in current political and business leaderships, it is unsure that serious planning will occur, giving way to crisis by default.
Growth rates of world oil consumption (e.g. 3-year averages) started moving up since the 1994-96 period, and have received new impetus through a combination of higher oil and gas prices, changing types of economic growth, economic cyclic changes, and the very fast economic growth of China, India and other large population, fast industrializing countries.
Current ‘trend rates of growth’ (long-term trend) are above 2.75%-per-year, ‘peaking’ to over 3% annual in high-growth periods such as 2004-2006. Current oil demand growth is well above world population growth (about 1.6%/year). That is: per capita average oil demand is increasing. Oil price rises since 1998-1999, it should be stressed, have not reduced this trend, but in fact have bolstered and reinforced it.
Through a mix of factors, oil demand by the US economy — consuming about 26% of world oil production for 4.5% of world population — is showing sustained growth. In 2003 this ran at about 2.9% annual; year-on-year trends for 2003-2004 will likely remain above 2%, despite hesitant and unstable economic growth trends in the US economy. Only self-imposed recession through high interest rates could change this in the short-term.
While initially unrelated to world oil prices, fast rising US natural gas prices underlain by falling domestic gas production will continue to exert a ‘ratchet effect’ on oil prices in US markets. In turn, this will affect oil prices outside the US. In Europe, gas supply is exposed to rapid falls in European ‘internal market’ gas production, also ‘ratcheting’ up oil prices, in Europe.
China, India and certain other fast industrializing, large population economies may triple or quadruple per capita oil demand within 10 to 15 years, on a ‘trends continued’ base. In the case of the Asian Tigers, we find that South Korea and Taiwan, for example, achieved a growth of 1604% and 703% respectively, in their national oil consumption through 1965-78, using data from BP Statistical Review. In the case of China and India, today, their oil import demand growth will be considerably higher than their consumption growth due to falling domestic oil production. Annual growth rates of imported oil are typically at double-digit rates (for China about 27% in 2002-03). Consumption growth trends for natural gas in these markets is even stronger than for oil — Indian natural gas demand is likely to increase about 20% for 2003-04, with China’s demand up by about 13.5%.
Due to the short-term prospect of ‘Peak Oil’ (the maximum sustained oil production rate the world can achieve), perhaps limiting total production to around 90 Mbd by 2007-2008, and featuring a fast increase in heavy oil, deep offshore oil, and ‘syncrude’ (tarsand and bitumin base) oil output, at high capital costs, prices will tend to maintain their upward movement throughout the 2004-2010 period.
Very large investments are needed if both OPEC and nonOPEC suppliers are to blunt the arrival of structural undersupply on world oil markets, which is likely imminent without much higher prices. These (higher prices) will both limit demand growth in the energy-saturated OECD countries, enable continued growth of oil demand by the New Industrial Countries, and enable financing of increasingly risky, higher cost exploration-development. Based on statements by Lee Raymond, and by John Thompson (in articles published by ExxonMobil in its journal ‘The Lamp’) spending in the oil and gas sector, on a worldwide basis, may need to exceed 2750 Billion US dollars, at early 2003 purchasing power levels (or about 3200 Bn dollars at 2004 parities), in the next 12 years.
Within this spending, oil exploration and development must also make a quantum leap. This overall development of the oil and gas sector is likely impossible without higher, and stable prices, in the range of about 45 USD — 55 USD or Euro 36 — Euro 42/bbl for oil, and about USD 8.50 or Euro 7/MMBTU for natural gas.
These pricing levels, it can be noted, were surpassed in constant dollar and purchasing power corrected terms through 1975-78, in which OECD country economic growth rates, and oil demand growth rates averaged about 3.75%-4% annual. At the time oil prices expressed in 2004 dollars were about 40 USD-55 USD/barrel.
Moving up to new price bands can be the focus of serious and committed international attention to the risks facing all players at this time. Runaway price rises in a free-for-all bidding process following supply loss of no more than 5% (as occurred during the 1979 fall of the Pahlavi regime in Iran) is the worst possible scenario. With military invasion and destabilization of Iraq by the US and UK, the world has effectively lost over 2.2 Mbd of export supply, equivalent to one full year’s oil demand growth.
Under any scenario the basic need for higher and less volatile oil and energy prices, accompanying serious and committed energy conservation, transition to renewable energy and restructuring for a low energy economy, habitat and society. This will be forced on energy consumers worldwide through increasing annual depletion losses, and slower additions of net supply, firstly for oil (around 2008) and then for natural gas (at latest by the 2015-2018 period). However, at present, energy transition is discarded as utopian and unworkable by current political decision-makers.
|Andrew McKillop||Founder member, Asian Chapter, Internatl Assocn of Energy Economists
Former Expert-Policy and programming, Divn A-Policy, DGXVII-Energy, European Commission
© Copyright Andrew McKillop 2004