OVER the past 10 years, the price of oil has risen from $10 a barrel to more than $120. But are the days of cheap motoring gone for good?
The rocketing prices have underlined a number of important changes in the global oil industry. There has been a major shift in the balance of power, which has repercussions for the future of the industry – and will influence the price of oil for ye
ars to come.
Traditionally, when oil prices rise, suppliers respond by ramping up production. But in recent years this hasn't been happening. According to data from both Opec and the US Energy Information Administration, output levels first reached 84 million to 86 million barrels per day in 2004, and have not risen much since.
At the moment, world supply and demand are in equilibrium, although data from the International Energy Agency suggest demand is at the upper end of the production range. This is forcing prices up.
Demand, though, continues to grow, which is hardly surprising given the infrastructure growth in emerging markets, particularly China and India. Americans use 10 times more oil per head than the Chinese, according to the International Monetary Fund. But the discrepancy is shrinking: over the past five years, 85% of the increase in global oil demand has been accounted for by non-OECD countries. As GDP in the developing world increases, so does the appetite for oil.
Most of the world's large oil basins have been discovered and exploited. The remaining reserves are often difficult to get at, frozen in the Arctic or submerged beneath deep oceans, and tend to be smaller than previous discoveries. As a result, new production has failed to keep pace with the rate of depletion. This gap is only likely to widen.
Half of the world's current oil production comes from 500 fields, most of which are fairly mature and past their point of peak production. The most accessible oil comes out of the ground first, so future production from these fields is more challenging. While there are a number of new projects scheduled over the next seven years, they won't make up for declines in production at existing fields.
Compounding matters is a marked shortage of suitable labour. Drilling for oil requires plenty of skilled and experienced workers, but a substantial proportion of workforce left the industry when times were lean. Many of those who remain are nearing retirement.
The industry also needs a lot of raw materials, such as steel, that are in short supply. Even when a new discovery of oil is made, it can take many years for the people and machinery to be in place to get at it.
Political instability is another obstacle, particularly as an increasing proportion of reserves – perhaps 80% – is located in unstable or contested regions. This adds to the potential for disruption to supplies and makes prices more volatile.
Where is new production likely to come from? Supplies from non-Opec countries are expected to reach a plateau shortly, putting a greater demand on Opec. Over the past 10 years, though, the cartel has been unable to achieve the sought after production increase. Unless non-OECD countries can curb their appetite for oil – through efficiencies and greater use of alternatives such as biofuels – new methods of obtaining similar forms of energy will need to be exploited.
These include bituminous sands (more commonly known as oil sands or tar sands) and liquefaction (the conversion of coal to a liquid form). But deriving energy from such methods is expensive, and it will have pricing implications for natural gas and coal as competition for hydrocarbon-based fuel becomes more intense.
So are we witnessing the end of cheap oil? In the short term, prices can be affected by geopolitical concerns and an element of speculation.
But unless significant new reserves are found – and can be extracted relatively easily – the comparatively low prices that OECD countries have paid to fuel their lives may be a thing of the past.
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Suhail Arain is investment director, US equities, at Scottish Widows Investment Partnership The full article contains 693 words and appears in Scotland On Sunday newspaper.
