Mainstream Weekly

Home > Archives (2006 on) > 2007 > December 1, 2007 > Global Oil Politics

Mainstream, Vol XLV, No 50

Global Oil Politics

Monday 3 December 2007, by Rajaram Panda

#socialtags

The UPA Government of Manmohan Singh is under tremendous pressure to raise the domestic oil prices in view of the rise in global prices. The Deputy Chairman of the Planning Commission, Montek Singh Alhuwalia, has already made it clear in no uncertain terms that postponing the increase in the retail oil prices does not make any economic sense. He further argues that the longer the government postpones any such decision in view of the forthcoming elections to some Indian States and continues to subsidise the oil companies, the lesser amount of money will be available for the social sectors. Both Manmohan and Montek are well known economists and none can dispute that what they say makes sense.

The worrying factor is that oil is flirting with $ 100 a barrel. It is not just another price spike. The sudden skyrocketing of the prices of oil suggests a new geopolitical era when energy increasingly serves as a political weapon. Some producers use it to advance national agendas, while consumers surely aspire to get some preferential treatment. For example, some oil companies in Venezuela discounted oil supplies to some favoured allies. China has been making frantic efforts to secure guaranteed supplies, while Russia has been issuing veiled threats to use natural gas to intimidate its neighbours and customers.

Viewed from the geopolitical and strategic point of view, it can be discerned that the US has sought to keep energy, mainly oil, widely available on commercial terms. In fact, in the American foreign policy priority has been given to prevent other nations from using oil to advance their foreign policies. Broadly speaking, such a strategy has contributed to minimise conflicts over natural resources and favoured global economic growth. In this framework, producing countries focused on maximising their wealth, while consuming nations relied on the market to get their oil. But the recent shifts in supply and demand now threaten this system.

Early this month, the International Energy Agency in Paris projected that the world oil demand would grow to 116 million barrels a day by 2030, up from 86 million in 2007. About two-fifths of the increase would come from China and India; other developing countries would account for much of the rest. The number of cars and trucks worldwide would more than double, to 2.1 billion. There is only one catch: oil supply probably would not satisfy the projected demand.

As against the IEA prediction, the US Government predicts that oil demand would reach 118 million b/d by that date. These acts of faith are really a forecast of the crisis, since calculations based on current trends (like a 15 per cent annual growth in Chinese demand) suggest that 140 million b/d will be needed by 2030.

THE truism is that the crisis is coming a lot sooner than that. World oil output is nearing 90 million b/d now, but it is never going to reach 100 million b/d. The bottleneck is not scarcity of oil in the ground. Someday that will happen, though it has not happened as yet. Proven oil reserves—discovered oil, deemed recoverable— total about 1.2 trillion barrel, according to the National Petroleum Council, a US Government advisory group of industry and academic experts. That is 38 years of supply at present consumption rates.

Next is undiscovered oil. The NPC reckons another trillion barrels. Finally, there is about 1.5 trillion barrels of “unconventional” reserves of heavy oil tar sands and oil shale recoverable at higher prices.

Producing this oil is another matter. Low prices in the past (1985-2002 average $ 21 a barrel) discouraged exploration. Companies consolidated: Exxon merged with Mobil, Chevron with Texaco. Cutbacks have left shortages of drilling rigs pipes, engineers, geologists and drilling crews. In the late 1990s, a deep-water rig could be leased for less than $ 200,000 a day; now the cost can run to $ 600,000.

With time, these shortages should ease. However, a bigger obstacle is access to reserves. The government-owned national oil companies control perhaps three-quarters of proven oil reserves but they often need private companies to explore and develop. High prices lead to prolonged negotiations. Governments already have more oil money than expected. In 2007, OPEC nations are projected to have revenue of $ 658 billion up from about $ 195 billion in 2002. Governments can afford to be tough and patient.

Higher prices have caused them to raise royalty rates and taxes on private oil firms. These suggest that the world oil output will advance slowly. For various reasons, Venezuela, Iran and Iraq are all producing below the previous peaks and below potential.

At some point, higher prices will dampen demand; changes in the weather and business cycle could also lead to power prices. Still, a major turning point has been reached. Earlier, the concentration of reserves in the unstable Persian Gulf and the operation of the cartel system led to disruption in supplies in 1973, 1979-80 and 1990 and coincided with wars and revolutions. The surplus that was built over the years has now vanished. The pivotal year was 2004, when global demand, propelled by China, rose about triple the expected rate.

The tightened gap between supply and demand has shifted the power to producers. The fear that lurks is that the competition for scarce resources could lead to political or even military clashes among major powers. As governments attempt to secure energy supplies outside the traditional market mechanism, conflicts are bound to become inevitable.

The recent surge in the oil price, which may see it reach $ 100 a barrel in the near future, is largely a mirage caused by the collapse in the value of the US dollar. But the longer term trend, which saw the price rise fivefold between 1999 and 2005, was driven by the tightening supply situation as demand raced ahead while production did not.

So how can one take the warning from the IEA that India and China are fuelling the continuous rally in international crude and that the consuming countries were within their right to subsidise motor or kitchen fuels to keep prices low? The OPEC, which supplies 40 per cent of the world’s crude requirement, does not subscribe to the IEA contention that India and China are responsible for the rise in oil prices. The OPEC is not concerned if any importing consuming country is subsidising fuel. The bottomline is that the international oil market shall continue to remain volatile in the coming years, as before.

Dr Rajaram Panda works as the Chief Programme Officer of the Japan Foundation’s New Delhi Office. The views expressed here are his personal.

ISSN (Mainstream Online) : 2582-7316 | Privacy Policy|
Notice: Mainstream Weekly appears online only.