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Oil: $100 a Barrel — or $200?

29 July 2007

Oil: $100 a Barrel — or $200?

By Gwynne Dyer

Nine of the last ten serious downturns in the world economy followed a spike in the price of oil, and we are heading for another spike, with oil back up near the peak of $78..40 a gallon that it reached almost exactly a year ago. A record number of options contracts are now being sold that entitle customers to buy oil in the future at $100 a barrel. That tells you where the inside players think the price of oil is heading, since those options will only be of value if the price were actually above $100 a barrel.

That is the price that Goldman Sachs, the world’s biggest brokerage house, predicted oil would reach by 2009. However, one big negative headline — further disruption of supplies from Nigeria or Iraq, say — and oil could be trading at over $100 a barrel by next month. But the concern is not really about oil prices. It’s about what more expensive oil will do to the world economy, and the professional optimists are still optimistic.

The spike at $78.40 in July, 2006 didn’t cause a recession, so why should this one? Indeed, why would even $100 a barrel cause a global economic crisis, given that one hundred US dollars today is only worth about the same in most other currencies as $78.40 was a year ago?

Oil sales are almost all denominated in US dollars, which are worth almost a third less in euros, pounds or yen than they were two years ago, so the countries of the Organisation of Petroleum Exporting Countries (OPEC), are not rolling in sudden wealth. The oil exporters spend most of their income in other currencies, so from their point of view the recent surge in the oil price only restores the purchasing power that they lost over the past two years due to the US dollar’s slide.

More importantly, most of the big importers of oil in the industrialised world are not really paying much more for oil than they were two years ago. The rising dollar price has been largely cancelled out by the fall in the value of the dollar, so it’s not really busting their budgets.

American consumers are feeling victimised, but they get little sympathy in the Middle Eastern countries that dominate OPEC, as most of these governments believe that President Bush’s invasion of Iraq has made their neighbourhood a far more dangerous place. OPEC is not going to pump more oil out of gratitude for Mr Bush’s policies.

As for the steep fall in the value of the US dollar, that’s what happens to your currency when you try to fight an expensive foreign war without raising taxes at home (as Richard Nixon found out over Vietnam in 1971.) Seventy-six dollars a barrel will not cause world economic growth to stall — and even $100 a barrel might not do so. But will it stop there?

What is really significant about the current surge in the price of oil is that it has NOT been driven by some apparently apocalyptic crisis like the Arab-Israeli war of 1973 or the Iranian revolution. (Neither event was actually all that apocalyptic, in retrospect, but the markets don’t do long-term perspective.) We have got three-quarters of the way to $100 a barrel without a crisis, driven simply by stagnant production and soaring demand in the big Asian economies. We could get the rest of the way on a rumour, and the price rise would not necessarily stop there.

The truly significant change in the situation is the stagnation of supply, not the rise in demand. New oil-fields are much smaller than discoveries in the previous generation (the last really big oil domain to be developed was the North Sea in the 1970s), and they tend to be in much more remote places.

The number of new deep-sea drilling rigs now under construction is almost equal to the total number that currently exist in the world (seventy). When you have to look for new oil at depths of over 1,500 metres (5,000 ft.) under the sea, or coax it out of the tar-sands of northern Alberta by equally expensive techniques, the era of plentiful cheap oil is definitely over.

OPEC is squeezing supply a bit to keep the price high, but its members are pumping close to capacity and only Saudi Arabia is putting in major new production capability. Non-OPEC oil output is predicted to stay flat for the next five years. It may not really be “peak oil” yet, but at the least we are seeing a lot of phenomena that mimic that time.

If the American mortgage crisis does not tumble the global economy into a recession, Asian demand will go on growing until the oil price does it. At $100 a barrel if we’re lucky — or via a detour through $200 a barrel if Dick Cheney decides to attack Iran.


To shorten to 725 words, omit paragraphs 2 and 7. (“That is…optimistic”;and “As for…there.”)

Oil: The Party Is Over

17 April 2006

 Oil: The Party Is Over

By Gwynne Dyer

Welcome to the world of $70-per-barrel oil. That’s if there is no crisis in the Gulf over Iran’s nuclear ambitions. If there is, then get ready for $140 a barrel. Oil briefly breached the $70 barrier eight months ago, but this time it is going up for good.

Exactly one year ago the investment bank Goldman Sachs put out a paper suggesting that the “new range” within which oil prices will fluctuate is $50-$105 per barrel. (The old range, still used by most of the oil industry when deciding if a given investment will be profitable, was $20-$30.) The price could surge well past the upper end of the Goldman Sachs range if the United States actually does launch military strikes against Iran, but it’s going up permanently anyway.

Whatever his longer-term plans, President Bush is unlikely to attack Iran before the mid-term Congressional elections in November, for three of the last four global recessions were triggered by a sharp rise in the oil price. But even without a Gulf crisis, the oil price will only stabilise at a price a good deal higher than now, because the major players in the market understand the long-term trends.

Transient events like the Iran crisis and the political unrest in Nigeria (which has cut that country’s exports by a quarter) drive the daily movements in the oil price, but the underlying supply situation is so tight that oil would stay high even if Nigeria turned into Switzerland and Iran opted for unilateral disarmament. “On production, there is nothing we can do. [OPEC, the Organisation of Petroleum Exporting Countries, is] already producing at maximum output,” said Abdullah al-Attiyah, Qatar’s Oil Minister.

This is not about “peak oil,” the notion that we are already at or near the point where total global oil production reaches its maximum and begins a long decline. That may well be true, but the present price rise is just about rising demand for oil as the big developing countries, especially the Asian ones, lift large parts of their populations into the middle class.

Middle-class people buy cars. They also run their air conditioners all summer, and take holidays abroad, and do other things that have big implications for total energy consumption, but above all they buy cars. For the foreseeable future most of the cars they buy will run on some form of refined oil.

The rising demand that drives the oil price up does not just come from the middle-class Americans (and, increasingly, Europeans) who insist on driving enormous SUVs with macho names like ‘Raider’, ‘Devastator’, and ‘Genocidal Exterminator’. It also comes from the new middle class of unassuming Chinese, Indian, Russian and Brazilian families who only want a modest family car for the school run and the weekend. There are just so many of them. This is the first big price rise that has been caused by rising demand rather than some temporary interruption of supply.

Goldman Sachs also predicted last year that in twenty years’ time there will be more cars in China than in the United States — about 200 million of them. Ten years after that, India’s car population will also overtake America’s. Within twenty years Russia and Brazil will each have more cars than Japan. We are headed for a billion-car world (unless all the wheels fall off first), and that means permanently high oil prices.

Good. If the oil price rises gradually from $70 to $100 over the next five years, people and governments will start paying serious attention to energy conservation and alternate energy sources (including nuclear energy). The sooner that happens, the less extreme the global warming that we will have to contend with as the century progresses. But if the oil price leaps to $100 or more in one swift jump we will have the mother of all recessions, and then there will be a desperate shortage of funding for developing alternative sources of energy.

A US attack on Iran is not the only threat to oil prices. If the markets should ever collectively decide that “peak oil” is upon us and that the supply of oil is heading for actual decline, the price would soar out of sight overnight. The oil companies and the governments of OPEC reassure us that oil reserves are ample to cover consumption at the current rate of world economic growth for decades to come, but they would be saying that whether it was true or not, and there is reason to suspect that it is not.

Never mind the geology. Just consider the fact that in the years 1985-1990, when OPEC’s declared reserves grew by a massive 300 billion barrels, no major new oilfields were brought into production. The “growth” was achieved by recalculating existing reserves, and the incentive for exaggeration was provided by OPEC’s decision to set production quotas in proportion to the total size of each member’s reserves. So over a quarter of the world’s total “proven” oil reserves of 1.1 trillion barrels may be no more than an accounting fiction.

The best we can hope for in the coming years, therefore, is a relatively slow and steady rise in the oil price, rather than a steep, fast rise that upsets everybody’s applecarts. The party is definitely over.


To shorten to 725 words, omit paragraphs 3 and 5. “Whatever…trends”; and “This is..class”)