Thursday, 20 August 2009

Opec’s greed will herald the end of the oil age

If producers keep prices high even when demand is slack, the world will be surprisingly quick to wean itself off fossil fuels
Bill Emmott
Proclamations of economic recovery in the past week in Japan, France and Germany, and soon in Britain and America too, may signal the end of the Great Recession of 2007-09, albeit bumpily. As things stand, though, this month may also signal the beginning of the end of something far more historic and significant: the age of oil.
Given how bleak the world looked as this year began, it feels remarkable to be seeing growth again so soon. But it is even more remarkable that the world is emerging from such a severe financial shock and slump with its most basic fuel, crude oil, priced at close to $70 a barrel, seven times its price of a little over a decade ago and double the level it was as recently as March.
So this must mean the rebound is even stronger than we think, with demand for oil soaring again? Not at all. Admittedly, this is a pretty opaque market, with many countries treating oil stocks as an official secret. Still, analysts at Banc of America Securities-Merrill Lynch reckon that global oil demand has been three million barrels a day lower in the second quarter of this year than in early 2008. They don’t expect it to get back above that until 2011 at the earliest.
No, the explanation for this potentially recovery-sapping (and certainly wallet-threatening) resurgence in the price of oil, and thus petrol at the pump, lies on the supply side. So, too, does the prospect of prices rising higher still, towards the extraordinary $147 a barrel reached in July 2008, or even beyond.
This point in the analysis is where the planetary gloomsters start citing a concept called “peak oil” (or, to the real oil nerds, “Hubbert’s peak”). This is the idea that the planet’s oil reserves are nearing (or, in some eyes, are past) a time at which the output from oilfields starts to decline. Don’t pay them any attention. The world is not running out of oil. What it is short of has been investment in oilfields and production. And the reason for that can be found in a different four-letter word: Opec.
The oil producers’ cartel has deliberately cut production by nearly five million barrels a day, which is more than the drop in global demand, to keep prices high. Opec members account for only about 35 per cent of world supply, but Russia, a non-member, accounts for a further 11.5 per cent and is co-operating with their efforts. Moreover, the Gulf states that dominate Opec have the largest oil reserves and lowest production costs, so can most easily and painlessly turn their taps on and off.
In the early years of this decade the kingpins of Opec, Saudi Arabia, used to say that their ideal price range for crude oil was $20-25 a barrel. Now, they say that it is $70-75. Crucially, the nationalists in Opec and the extortionists in Russia have blocked the big Western oil companies from investing as much in developing their oil reserves as they would have liked, driving them into higher-cost fields elsewhere. Investment there, even before the financial crisis, has been slow as the sudden rush to explore and expand drove up the costs of engineers and equipment. Since the financial crisis, it has slumped.
That will change over the next decade or so, if prices stay high. Brazil has discovered a huge new offshore oilfield and Angola has shown just how quickly development can occur. In seven years it has trebled its oil output, joined Opec and is now challenging Nigeria for its status as sub-Saharan Africa’s biggest oil producer — and hence as the leading oil-rich basket case. That is why the US Secretary of State, Hillary Clinton, swallowed her human rights scruples and paid homage to the Angolans on her tour of Africa, lest they become overly friendly with China instead.
Yet by the time non-Opec oil supply has been boosted, something even more important will have occurred, if Opec continues to overplay its hand and support painfully high prices. In the 1970s, the rather quotable Saudi Oil Minister, Sheikh Zaki Yamani, had a nice saying: “The Stone Age did not end because the world ran out of stones. Nor will the oil age end because we have run out of oil.”
It will end when oil consumers run out of patience with greedy oil producers, and develop substitutes instead. The Arabs should surely see a warning sign in the fact that the first new product of which Fritz Henderson, boss of the fresh-out-of- bankruptcy (and quasi-nationalised) General Motors, emerged to boast was the Chevrolet Volt, a petrol- electric hybrid, which is claimed to do 230 miles per gallon.
They may just dismiss that as good politics, given the urge of governments all around the world to paint their fiscal stimulus packages a deep shade of green by handing out subsidies to anyone claiming to be developing cleaner technologies. Yet they should remember this. When the 1970s oil shocks gave Japan a second whammy after a sharp revaluation of the yen had given it a first, its Government and industry set about transforming themselves from cheap clunker-producers into the world’s leading makers of semiconductors, consumer electronics and fuel-efficient cars — all within ten years.
This time around, there are scientists and engineers all over the globe dying to bring about just that sort of transformation — but nowhere more so than in China, the world’s second-biggest oil consumer, whose policymakers fully expect their currency to have to be revalued, hitting cheap energy-guzzling producers, and where the need to clean up the environment is urgent.
There are also scores of governments keen to show their green credentials at the Copenhagen climate change conference in December this year by promising limits on the carbon dioxide emissions of which coal and oil are the biggest source — and keen to find tax revenues to plug their huge fiscal holes, for which fuel tax will come in very handy indeed.
The usual forecasts, based on extrapolation of past trends, do not see electric cars or non-fossil fuel power plants having a really big impact for another 20-30 years. Imagine, though, the effect on innovation of oil at $100-200 a barrel, of hundreds of thousands of Chinese (and Japanese, European and America) engineers trying to do for solar power and for car batteries what has been done in the past decade for mobile phones and computers.
Then, the usual forecasts will turn out to be wrong — as usual. The oil age, which began in earnest a century ago in America, will be at an end.
Bill Emmott was Editor of The Economist, 1993-2006