Supply not keeping pace with demand: Oil must rise

Prof. Jonathan Story, Emeritus Professor of International Political Economy, INSEAD Business School.

Analysis provided for Utilies-ME.com by Prof. Jonathan Story, Emeritus Professor of International Political Economy, INSEAD Business School

A simple answer to the question of which way the world oil price will move may be summarised in two words: high and rising. No less an authority than the International Energy Agency (IAE) predicts that global energy demand will grow 36% between 2009 and 2035, with China, India and the Arab world leading the way. China is expected to account for 25-40% of the increase in global demand, driven by a voracious appetite there for the automobile. In addition, economic activity has resumed in the EU industrial heartland of Germany as well as in the United States, and world trade is humming.

Supply, though, is not keeping pace with demand for oil, and its derivative products, by a world population, now reaching 7 billion. On the supply side, an assessment reported in Petroleum News in 2009 of 800 oil fields in the world, covering three quarters of global reserves, found that most of the biggest fields had already peaked and that the rate of decline in oil production was accelerating. On top of this, experts identified a chronic under-investment by oil-producing countries, a feature that was predicted as bound to result in an "oil crunch" as soon as pre-2008 global growth rates were resumed. End of story: which way oil prices? High and up.

The flaw in this story is that it views the world as a market, oil as a commodity, and the future as predictable. A sounder piece of advice comes down from Pliny the Elder who stated that the only certainty is that nothing is certain.

Which way the oil price moves is intimately tied into the dialectical process we call globalisation. It features widening prosperity and deeper imbalances in economic development, a steep hierarchy in the distribution of wealth and power alongside a diffusion of the global power structure, and an unparalleled networking of humanity through television, the mobile phone and the internet, thereby bringing people to live check by jowl in an unprecedented intimacy, despite the inherited distances between religion, languages or cultures. Globalisation is anything but a one way street to prosperity and freedoms for all.

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Two recent events should remind us of this. One is related to the geological fact that the market power of the very few oil-producing countries that hold substantial reserves of oil – mostly in the Middle East, North Africa and the Gulf, is already high at about 40 per cent share of the oil market, and may grow in the future, if the market trends cited above continue.
The other is the far-reaching suggestion by President Mevdevev’s human rights council that the Soviet Union be declared a criminal state, and that all archives on its activities be opened to scholars. “Complete acknowledgement of the Russian catastrophe of the 20th century”, the proposal suggests, is vital to establishing public trust in the Russian state.

For alongside rational calculations of supply and demand, the human saga is driven by our collective inventiveness, by our passions and emotions. And emotions matter notably in regard to oil, where the world’s growing dependence on one region inspires a “fear factor” which contribute as much as $15-20 per barrel in price spikes.

Over-reliance of the world on the region prompts fears of supply disruptions related to concerns about the prospect of a nuclear-armed Iran, the deep social changes afoot in the Arab world, or the precarious hold on power of some rulers there—as evidenced in the recent fall of Presidents Ben Ali of Tunisia and Mubarak of Egypt, the recent events in Libya, or the disturbances in Syria and Bahrain. They are compounded by fears in the region and elsewhere that, just as President Bush’s determination to unseat Saddam Hussein in early 2003 was interpreted as a grab for oil reserves, the same motive is at play in Franco-British policy, with US backing, on enforcing UN Resolution 1973 over Libya’s airspace.

The motive, needless to say, lies in the European Union’s espousal of the cause of human rights, in counterpart to the disaster of the two world wars, and as the battleaxe which felled the communist party-states of central-eastern Europe in the year 1989, leading to German unity and the collapse of Soviet power. In the view of the governments of France and Great Britain, the Union would lose all credibility in the eyes of its own citizens if Colonel Gaddhafi’s tanks were allowed to crush his opponents in Benghazi, in the manner that the Red Army tanks crushed the student movement in Prague in August 1968. The “Arab spring”, to use the current idiom, is a European interest that opens the way to a wider peace arrangement across the whole region, to a more successful absorption of a European Islam, and a careful reduction of the American presence there-a development arguably in the US interest.