Enigma Of Low Oil Prices

Low Oil prices is as dangerous as high oil prices politically. The world at large can never escape the enigma of our addiction to oil.
View more...


Preview only show first 6 pages with water mark for full document please download


Oil is one commodity that has the potential to create or destroy wealth of billions of citizens in the world. The problem is like energy, wealth can neither be created nor destroyed but can only change the form. When the oil price is high the wealth of the producing countries citizens increase manifold at the cost of the consuming citizens of the world. The reverse is always true when the oil prices are low. Can both live in harmony? Is there a win-win situation? This is the context of my argument in this article. To set the context right we need to understand the problems of high oil prices and the cheap oil prices with some implications. This will lead us to a solution to a better world of energy production and consumption. Only a month back, we were bemoaning the high prices of oil. The doomsayers are out predicting oil prices at $200 with extreme strains on large sectors of economy in various countries. Today oil at over $40 a barrel, costs less than one liter of water that we buy in India. Prices that low and their equivalent at the pump will no doubt be viewed as a blessing by many hard hit consumers. Here, however, is a simple but crucial reality – no matter how much it costs, whether it’s rising or falling, oil has profound impact on the world we inhabit. Good or bad times, oil will rule supreme and will continue to occupy the largest share of the world’s energy demand. For all the talk of alternatives, petroleum will remain an irreplaceable source of energy for at least the next several decades. As per recent estimates of the Planning Commission, oil and gas compensates for 38% of energy demand in India and is likely to increase in the next few decades. A similar pattern holds for the planet as a whole: Although bio-fuels and other renewable sources of energy are expected to play a growing role in the global energy equation, don't expect oil to be anything but the world's leading source of fuel for decades to come. Keep your eye on the politics of oil and you'll always know a lot about what's actually happening on this planet. Low prices, as at present, are bad for producers, and so will hurt a number of countries, including Venezuela, Iran, Russia, Mexico, Nigeria, and Saudi Arabia, which could experience internal unrest as oil revenues, and so state expenditures, decline. These countries with windfall oil revenues have splurged their money in defense build-up to meet their political ends. No less important, diminished oil prices discourage investment in complex oil ventures like deep-offshore drilling, as well as investment in the development of alternative energy sources. Perhaps most disastrously, in a cheap oil moment, investment in non-polluting, non-climatealtering alternatives like solar, wind, and tidal energy is also likely to dwindle. In the longer term, what this means is that, once a global economic recovery begins, we can expect a fresh oil price shock as future energy options prove painfully limited. Clearly, there is no escaping oil's influence. Yet it's hard to know just what forms this influence will take in the year. Nevertheless, here are three provisional observations on oil's fate -- and so ours -- in the year ahead. 1. The Price of Oil will Remain Low Until it Begins to Rise Again: I know this sounds insane. The price of oil has essentially dropped through the floor because of the collapse of demand due to the onset of a staggering global recession. The contraction in international demand has indeed been stunning. After rising to a maximum in April-May 2008, demand started falling by 100,000 barrels per day for the whole of 2008 globally. This year the US Department of Energy predicts the global demand to fall by a far more impressive 450,000 barrels per day. The first time in three decades that world consumption will decline in two consecutive years. Needless to say, these declines were unexpected. In the happy days, believing that international demand would continue to grow, the global oil industry steadily added to production capacity and was gearing up for more of the same in 2009 and beyond. Indeed, under intense pressure from the Bush administration, the Saudis had indicated last June that they would gradually add to their capacity until they reached an extra 2.5 million barrels per day. As of now, the industry is burdened with excess output and insufficient demand -- a surefire recipe for plunging oil prices. Even the December 17 decision by members of the Organization of the Petroleum Exporting Countries (OPEC) to reduce their collective output by 2.2 million barrels per day has failed to cut ice. How long will the imbalance between demand and supply last? Most analysts suspect that a true global recovery will not even get under way until 2010, or later. It all depends on how deep and prolonged you expect the recession – or any coming depression -- to be. A critical factor will be China's ability to absorb oil. After all, between 2002 and 2007, that country accounted for 35% of the total increase in world oil consumption. The upsurge in Chinese consumption, combined with unremitting demand from older industrialized nations and significant price speculation on oil futures, largely explained the astronomical way prices were driven up until last summer. But with the Chinese economy visibly faltering, such projections no longer seem valid. Many analysts now predict that a sharp drop-off in Chinese demand will only accelerate the downward journey of global energy prices. Under these conditions, an early price turnaround appears increasingly unlikely. 2. When Prices Rise Again, They will Rise Sharply: At present, the world enjoys the unfamiliar prosepect of a global oil production surplus. This is a problematic aspect. With low oil prices the incentives for the oil companies to invest in costly new technologies is minimal, which means no new capacity would be added to global inventories. Simply put, when demand begins to surge again, global output is likely to prove inadequate. The plunging oil price is like a dangerously addictive painkiller- short term relief is being provided at a cost of serious long term harm. Signs of a slowdown in oil-output investment are already multiplying fast. Saudi Arabia, for example, has announced delays in four major energy projects in what appears to be a broad retreat from its promise to increase future output. Among the projects being delayed are a $1.2 billion venture to restart the historic Damman oil field, development of the 900,000 barrel per day Manifa oil field, and construction of new refineries at Yanbu and Jubail. In each case, the delays are being attributed to reduced international demand. In addition, most "easy oil" reservoirs have now been exhausted, which means that virtually all remaining global reserves are going to be of the "tough oil" variety. These require extraction technology far too costly to be profitable at a moment when the per barrel price remains under $50. Principal among these are exploitation of the tar sands of Canada and of deep offshore fields in the Gulf of Mexico, the Gulf of Guinea, and waters off Brazil. While such potential reserves undoubtedly harbor significant supplies of petroleum, they won't return a profit until the price of oil reaches $80 or more per barrel -- nearly twice what it is fetching today. With industry cutting back on investment, there will be less capacity to meet rising demand when the world economy does rebound. At that time, expect the present situation to change with predictably startling rapidity, as rising demand suddenly finds itself chasing inadequate supply in an energy-deficit world. When this will occur and how high oil prices will then climb cannot, of course, be known, but expect gas-pump shock. It's possible that the energy shock to come will be no less fierce than the present global recession and energy price collapse. 3. Low Oil Prices Like High ones will Have Significant Worldwide Political Implications: The steady rise in the oil prices between 2003 to 2008 as much a result of increasing demand to the perception that the energy industry is having difficulty in bringing sufficient quantities of supply. Many analysts spoke of the arrival of "peak oil," the moment at which global output would commence an irreversible decline. All this fueled fierce efforts by major consuming nations to secure control over as many foreign sources of petroleum as they could, including frenzied attempts by Chinese and Indian firms to gobble up oil concessions in Africa and the Caspian Sea basin. With the plunge in oil prices and a growing sense of oil plenty, this dog-eat-dog competition is likely to abate. A new ball game in the political reality is to be expected with the low prices. While competition among consuming states may lessen, negative political conditions within producing nations are sure to be magnified. Many of these nations, including Angola, Iran, Iraq, Mexico, Nigeria, Russia, Saudi Arabia, and Venezuela, among others, rely on income from oil exports for a large part of their government expenditures, using this money to finance health and education, infrastructure improvements, food and energy subsidies, and social welfare programs. Soaring energy prices, for instance, allowed many producer countries to reduce high youth unemployment -- and so potential unrest. As prices come crashing down, governments are already being forced to cut back on programs that aid the poor, the middle class, and the unemployed, which is already producing waves of instability in many parts of the world. For example, Russia's state budget remains balanced only when oil prices stay at or above $70 per barrel. With government income dwindling, the Kremlin has been forced to dig into accumulated reserves in order to meet its obligations and prop up sinking companies as well as the sinking ruble. The nation hailed as an energy giant is running out of money quickly. Unemployment is on the rise, and many firms are reducing work hours to save cash. Although Vladimir Putin remains popular, the first signs of public discontent have begun to appear, including scattered protests against increased tariffs on imported goods, rising public transit fees, and other such measures. The damage is profound for Gazprom, Russia’s biggest company and the source of approximately one quarter of Government tax income. The market value of the company has dropped from $350 billion to today at $85 billion. Plunging oil prices are also expected to place severe strains on the governments of Iran, Saudi Arabia, and Venezuela, all of which benefited from the record prices of the past few years to finance public works, subsidize basic necessities, and generate employment. Like Russia, these countries adopted expansive budgets on the assumption that a world of $70 or more per barrel gas prices would continue indefinitely. Now, like other affected producers, they must dip into accumulated reserves, borrow at a premium, and cut back on social spending -- all of which risk a rise in political opposition and unrest at home. The government of Iran has announced plans to eliminate subsidies on energy, a move expected to spark widespread protests in a country where unemployment rates and living costs are rising precipitously. The Saudi government has promised to avoid budget cuts for the time being by drawing on accumulated reserves, but unemployment is growing there as well. Diminished spending in oil-producing states like Kuwait, Saudi Arabia, and the United Arab Emirates will also affect non-producing countries like Egypt, Jordan, and Yemen whose economy depends on these producers. All this is occurring against the backdrop of an upsurge in the popularity of Islam, including its more militant forms that reject the "collaborationist" politics of pro-U.S. regimes like those of Hosni Mubarak of Egypt and King Abdullah II of Jordan. Combine this with the recent devastating Israeli air attacks on, and ground invasion of, Gaza as well as the seemingly lukewarm response of moderate Arab regimes to the plight of the 1.5 million Palestinians trapped in that tiny strip of land, the stage is set for a major upsurge in anti-government unrest and violence. If so, no one will see this as oil-related, and yet that, in part, is what it will be. Conclusion In the context of a planet caught in the grip of a fierce economic downturn, other stormy energy scenarios involving key oil-producing countries are easy enough to imagine. When and where they will arise cannot be foreseen, but such eruptions are only likely to make any future era of rising energy prices all that much more difficult. And, indeed, prices will eventually rise again, perhaps some year soon, swiftly and to new record heights. At that point, we will be confronted with the sort of problems we faced in the spring and summer of 2008, when raging demand and inadequate supply drove petroleum costs ever skyward. In the meantime, it's important to remember that, even with prices as low as they are, we cannot escape the consequences of our addiction to oil.