Editorial: Oil matters
Published by The Straits Times, Singapore on 2004-08-05
The record rise in crude oil prices in recent weeks - to more than US$44.23 a barrel - poses a grave threat to global economic recovery, especially in Asian nations with ambitious sustainable development agendas that are designed to alleviate endemic poverty and bring more prosperity to their middle classes. A curious question arises: Why were the experts saying until just a short while ago that global demand and supply was nicely balanced? How could they get the price situation so wrong?
There's concern that low-sulfur light crude oil - the most widely followed benchmark at the New York Mercantile Exchange - may go beyond US$50 a barrel this year, particularly with the onset of winter. That's good news, of course, for the 11 member-Organisation of Petroleum Exporting Countries (Opec), the 44-year-old Vienna-based cartel whose revenues are expected to reach a staggering US$800 billion this year. Indeed so unexpectedly huge is the windfall that Opec members such as Abu Dhabi admit openly that they don't quite know what to do with this money. Warning signs about higher prices, diminishing supply and profligate consumption by industrialised nations, however, have been flashing for quite some time now. Internationally accepted prescriptions like more conservation and more rapid deployment of technologically advanced alternate forms of energy like hydrogen fuels, largely remain in the realm of words.
Unlike previous geopolitically-related oil crises, there are some new contributors to the current situation - which has hedge fund managers singing with joy. One is China, whose relentless economic expansion has created an insatiable thirst for oil, making it the world's second biggest consumer of oil after the United States; it's expected to import more than 110 million tones this year, an increase of 21 percent from 2003. Sinopec, the state-owned petroleum refining company, says that imports may even exceed 120 million tonnes, 60 percent of them from the Middle East. Car sales are expected to rise this year by 33 percent from last year, to 2.6 million units. Similarly, India's current growth rate of around 7 percent annually necessitates more oil imports. Another contributing factor is the tax problems of Russia's Yukos, which pumps an average of 1.4 million barrels a day, representing some 18 percent of the 5 million barrels a day that Russia produces and 2 percent of the world's crude oil supply. The Russian government has charged Mikhail Khodorkovsky, chief of Yukos - and a foe of President Vladimir Putin as well as the richest man in Russia - with tax evasion, fraud, forgery and embezzlement. It claims that Yukos owes more that US$3.4 billion in back taxes for 2000 alone, and probably more for subsequent years. There's mounting worry that the company may be forced into bankruptcy - which would most certainly curtail production. Pipeline sabotage continues in Iraq, another Opec member, and labour unrest has curtailed exports from Nigeria. The U.S., faced with new terrorist threats, has increased its Strategic Petroleum Reserves to 218 million barrels, which means less gasoline in the market and more imports. Saudi Arabia, which sits on top of 25 percent of the world's proven oil reserves, may not be able to increase its daily output from 9.5 million barrels to 10.5 million barrels because of technical reasons.
The obvious solution to the world's ongoing oil crisis lies in more conservation and tightened consumption, especially in the industrialised societies. That's not about to happen any time soon. Which is why more attention needs to be paid to oil exploration in environmentally benign ways. The US Geological Survey says that the current proven world reserves of about 800 billion barrels can be enhanced by three trillion barrels (correct) that have yet to be found and extracted. That would mean the investment of US$2.2 trillion (correct) by oil companies over the next three decades. They certainly have the money, especially these days. Look at it this way: if there isn't such investment, the current oil reserves will last only another 10,000 days, or 27 years. And if global oil consumption rises by five percent annually, the reserves will see us through for only 15 years. Oil companies and their patron governments must act in the larger interest of the global commons.
Senior Writer and Global-Affairs Columnist