The
Death Of Cheap Oil
By Adam Porter
05
August, 2004
Aljazeera
Oil
prices are in a state of flux or so we are told. But the truth of the
matter may be far simpler than that; maybe production cannot meet soaring
global demand.
As prices hit record
highs, some analysts' remarks, and much of the comment in the media,
are directed at uncertainty surrounding Russian company Yukos, Iraqi
pipeline attacks, Nigerian strikes and a forthcoming presidential referendum
in Venezuela.
Yet behind the easy
headlines, so called emerging economies such as China and India, added
to rising American demand, are putting pressure on the price of energy.
Meanwhile, major oil fields are withering, no new ones are being found
and supplier countries are already pumping at their production limits.
Major problems
As an example, in
the same year as China's consumption rose by a crushing 26% its main
oilfield, Daqing, started to decline.
The Chinese state,
not known for releasing accurate figures on anything, said the decline
would be around seven per cent a year. It may well be faster.
As Daqing produced
around 50% of China's total oil needs, one does not need to be a mathematician
to see the problem. China will need to import large quantities of oil
to satisfy its astronomical growth in consumption - growth which shows
little sign of slowing.
Ali Bakhtiari,
head of strategic planning at the Iranian National Oil Company (NIOC),
dismisses the media chat, as just that.
"Cheap oil
is dead. You are never going to see oil priced at $25 a barrel again.
These high prices, yes, they are exacerbated by Yukos, Iraq and so on,
but more importantly they are a sign that we have major structural problems
with supply.
"They are a sign that there is now no spare capacity for the fluctuations
of the markets."
Then we can add
some other major determinants. That the North Sea oilfields, long a
cash cow for the British and Norwegian governments, have peaked and
are declining at a faster rate than analysts expected.
Then factor in the
millions of "lost" barrels of oil that were misrepresented
by Royal Dutch Shell, to the tune of 23% of their total reserves. Mix
up the fact that no major oil fields were discovered in the last 18
months, despite increased technological innovation.
And round it all
off with the OPEC statement that producer countries have "no more
supply" according to spokesman, Indonesian oil minister Purnomo
Yusgiantoro. This just weeks after OPEC assured markets production was
"no problem".
Panic pricing
Thus the underlying
reasons for high oil prices seem to be that demand is outstripping possible
production.
Additional worries
such as Yukos, Iraq, Nigeria and Venezuela are the icing on the crumbling
energy cake.
Indeed Yukos is
still pumping oil at record levels, Nigeria produced more oil in June
2004 than it has done for six years and a lack of Iraqi oil on the market
place did not drive prices to $43 during the 12 years of sanctions.
Indeed there is more Iraqi oil reaching refineries now than since the
first Gulf war.
"Remember on
June 3, when oil was $43 a barrel?" continues Bakhtiari. "Then
OPEC said they would increase production, by 2.5m barrels a day from
July 1. It did make a small dent in the price for a while, but now we
are already back where we started."
Critical point
Dr Colin Campbell
is former executive vice president of oil company Total. He is one of
the leading industry figures who have long stated that oil prices are
set to rocket, as production fails to meet soaring demand.
"Because of the way the market works, what was previously a minor
strike in Nigeria or a commercial row in Russia is now a straw that
will break the camel's back.
"Once you are
producing flat-out, there is nothing you can do about disruptions. Once
a slight imbalance occurs, then traders, who are there to make money,
will price oil accordingly."
Of course, a surge
in oil prices does benefit some areas of the global community, the oil
companies.
BP has reported
record 2nd quarterly profits of $3.9bn to June, a 23% yearly increase.
The market was disappointed it did not make more.
Lord Browne, chairman
of the super-giant, acknowledged that prices would "stay high for
the short term", adding unconvincingly that they would come down
"one day". That one day may be in the form of a recession.
Bleak prospects
Then there is the
Saudi Arabian angle. Another major oil figure, the recently retired
executive vice president of Saudi Aramco, Sadad al-Hussaini, has frightened
the markets with recent articles in Oil & Gas Journal.
In them he cites
"proven developed reserves" of Saudi Arabia at only "130bn
barrels", half of what Saudi Arabia normally claims to have underground.
A lack of transparency
over reserve figures, many of which are thought to be groundless, has
further undermined confidence in oil producers to match demand.
Add to this that
Russia's oil minister has claimed that Russian output will fall in 2005
and that Indonesia became the first OPEC country to admit, in June,
that it had become a net importer and one can see the underlying trend.
Campbell draws some
difficult conclusions. "It could be that the long awaited peak
in oil production is either here or about to arrive. We are seeing that
nowhere has the capacity to increase production."
Bakhtiari agrees.
"We are approaching the plateau of production; these are the first
signs that we are there. As I said, cheap oil is history."
If they are right,
there are harsh times ahead.