The Dawn Of
A New Oil Era?
By Robert J.
Samuelson
29 March, 2005
Newsweek
The
interesting question about the advent of $50-a-barrel oil is whether
it signals a new era in the economics and politics of energy. To sharpen
the question: have we entered a period when, owing to consistently strong
demand and chronically scarce supplies, prices have moved permanently
higher? We don't know, but the answer could be "yes" for at
least one reason: China.
Americans consume almost 21 million barrels of oil a day, a quarter
of the world total of 84 million barrels a day, reports the International
Energy Agency. But China is now second at 6.4 million barrels a day,
and its demand could double by 2020, various analysts told a conference
held last week by the Center for Strategic & International Studies
(CSIS) in Washington. Moreover, China will import most of its new needs;
its domestic output is steady at about 3.5 million barrels a day. It's
unclear how much China's extra demandand that of other developing
countries, especially Indiawill stimulate extra oil production.
Oil markets do undergo
seismic shifts. Until 1974, the United States was the world's largest
oil producer. Supplies were plentiful; Americans controlled their own
oil prices, as Daniel Yergin explained in his 1991 book "The Prize."
With surplus production capacity, the Texas Railroad Commissionwhich,
despite its name, regulated oillimited output to stabilize prices
while maintaining a "security reserve" for times of crisis,
wrote Yergin. In March 1971, the commission allowed all-out production
to meet rising demand. America's oil surplus had vanished. Worldwide
prices rose, and OPEC (the Organization of Petroleum Exporting Countries)
became more powerful.
We could now be
at a similar inflection point, where the global oil system changes dramatically.
Certainly the short-term outlook already has. From 1991 to 1999, world
oil demand rose annually about 1 million barrels a day, Guy Caruso,
head of the U.S. Energy Information Administration, told the CSIS conference.
But in 2004, demand unexpectedly jumped 2.7 million barrels a day. A
third of the increase came from China, and much of that reflected electricity
shortages. Unable to get reliable power, factories installed their own
generators. China's regular power plants overwhelmingly use coal, but
the new generators used imported diesel fuel. China could solve this
problem by building more power plants and easing rail bottlenecks that
hinder coal shipments. But there will still be new sources of oil demand.
China now has about 20 million cars and trucks, energy consultant James
Dorian said; by 2020, it could have 120 million. (In 2001, the United
States had about 230 million cars, vans and trucks.)
Higher oil demand
has now strained the global production system to its limits. Spare capacity
of about 1.5 million barrels a day is the lowest in 30 years, said CSIS's
Frank Verrastro. Most is located in Saudi Arabia. Higher prices partly
reflect fear of more supply disruptionsfrom terrorism, war, political
upheavals, weather or accidents. In theory, higher prices should be
partially self-correcting. They should dampen demand and encourage supply.
But theory must always be revised for new realities. Here, there are
two.
One is that in rich countriesnotably the United Statesrising
incomes make it easier to afford higher energy prices. In the latest
month, American oil demand was actually up 2 percent from a year earlier
(and, yes, adjusted for inflation, today's gasoline prices are still
roughly a third below levels reached in 1980 and 1981). A second reality
is that big oil companies seem less willing or able to find new oil.
A study by Credit Suisse First Boston reports that major companies have
replaced more than half their depleted oil reserves by buying reserves
from other companies or re-estimating existing reserves. In 1990, companies
replaced two thirds of reserves with new discoveries. The poor performance
may partly reflect the fact that 72 percent of the world's oil reserves
are controlled by state-owned oil companies, says Verrastro. Private
companies can often get exploration rights only on terms that involve
(to them) too much risk and too little profit.
Anything could now happen to oil. Prices could drop, if the immediate
fears behind today's buying don't materialize. But the long-term trends
are unpromising. Global demand is rising inexorably; global supply seems
less expansive. Dependence on precarious Persian Gulf oil will probably
increase. The global economy remains hostage to uncertain or expensive
fuel. Producing countries may become stronger, consuming countries weaker.
There may be more competition among consuming nations to secure long-term
supply contracts. China has already made a few such deals.
The message for
Americans is simple. We import nearly 60 percent of our oil. We can't
any time soon eliminate imports, but we could limit them by producing
more at home and conserving more (meaning higher fuel taxes, tougher
gasoline standards, smaller vehicles and more hybrid engines). That
would lessen our own vulnerability and ease pressures for the rest of
the world. The debate that pits greater production against greater conservation
is wrong. We need both.
© 2005 Newsweek,
Inc.