ROME -- It's amazing how quickly we've become accustomed to expensive oil. But what is expensive? When oil climbed to an all-time high of $147 (U.S.) a barrel in July, our oil-addicted planet seemed on the verge of economic suicide. Then came the selloff. The current price of $100-and-change seems a bargain, even though it's quadruple 2003's level and almost 30-per-cent higher than a year ago.
The hope among consumers, businesses and politicians, if not the green crowd and the oil industry itself, is that prices will keep falling and that $100 a barrel will once again seem unimaginably high.
And why wouldn't they be right? Oil demand in North America, Europe and the other oil-guzzling bits of the world is falling as those economies take a hit. The speculators made their killings and have fled to their villas, removing the froth from the energy markets. Saudi Arabia has opened the spigots and a new generation of gas-sippers is rolling into showrooms. And didn't we see you walking to Starbucks the other day instead of practically ramming the counter in your Ford Explorer?
So relax. Barring a fresh shooting war in the Middle East, the new "expensive" might be something like $90 a barrel and the new "normal" $60 or $70. We could live happily with those numbers even though we remember the days, not so long ago, when a fill-up cost no more than a case of 24.
Dream on. In a year or two, perhaps well earlier, $100 could look cheap again. You've got to ask yourself: What has changed since the selloff began a couple of months ago? The economy, globally speaking, is still growing. Many of the biggest oil fields are wheezing like geriatric smokers and few new discoveries of any significant size have been made. In the end, economics, oil geology and oil-reserve physics will determine the price of petroleum. All these forces point to higher oil prices.
Let's start with oil demand. True, demand among the 30 countries in the Organization for Economic Co-operation and Development (OECD) is waning. The International Energy Agency's (IEA) latest Oil Market Report says OECD oil-product demand peaked at 49.8 million barrels a day in the last quarter of 2007. By the second quarter of this year, demand had fallen to 47.7 million barrels a day. The IEA expects it to rise marginally, to about 48 million barrels a day, in 2009.
But every drop saved in the OECD is more than consumed elsewhere. The non-OECD countries are sucking oil like it's free champagne. In 2005, their consumption figure was 34.2 million barrels a day. The IEA expects it to go to 39.7 million barrels a day next year, thanks to voracious demand in China, India, parts of Africa and the other usual suspects. Non-OECD growth is propelling overall oil demand, taking the world figure from 84 million barrels a day in 2005 to 87.8 million barrels a day in 2009. Don't confuse slowing demand growth for slowing demand.
You might ask where the extra millions of barrels will come from. Most of the world's oil still comes from the big, prolific fields found by the 1970s. They are getting tired.
North Sea production is in freefall and Britain is now a net oil importer. Cantarell, the supergiant field that made Mexico the biggest supplier of oil to the United States in the 1980s (Canada now has that role), is also in rapid decline. Three years ago Kuwait shocked energy markets when it announced that Burgan, the world's second-biggest oil field, was past its peak and that production would have to be trimmed. And so on.
Yes, Brazil recently found a deepwater biggie, called Tupi. But that discovery stands out for its rarity. Many Tupis would need to be found to keep the oil markets well-lubricated for a long time. At current consumption rates, a billion-barrel field would keep the world going for less than a dozen days.
Other factors could conspire to lift prices. Note that OPEC has announced a small production cut (in reality, the enforcement of the previous production quota). This delivers the message that OPEC sees $100 oil as its soft floor and that it will not tolerate, say, $60 oil. Nor might the oil companies themselves. Last week, the French energy giant Total, in its mid-year presentation, said its Canadian oil sands need a price of about $90 a barrel just to achieve a 12.5-per-cent internal rate of return, while its deepwater Angolan wells need $70.
James Buckee, the former CEO of Canada's Talisman Energy, has a good point about the ability of oil companies, or lack thereof, to meet rising demand. Most of the world's oil is now in the hands of the huge national oil companies, from Algeria's Sonatrach to Saudi Aramco. They don't move as fast as the smaller private oil companies like Exxon and Shell. The national oil companies run like juggernauts and their oil fields can't be ramped up and down quickly. "There is no instantaneous supply response from them," he says.
You might argue that the flaw in the rising oil scenario is the speculators, who widely took the heat for using index funds to drive prices to unheard of levels. They're apparently gone, meaning oil should settle to a natural (lower) economic level, whatever that is.
But guess what? Last Thursday the U.S. Commodity Futures Trading Commission concluded the speculators can't take the blame. In fact the speculators were getting out of the market in the first half of the year, even as prices were soaring. If I were a speculator, I would consider this a fine time to get back in.
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