Scare story

2008-05-05 00:00

Last week Hamish McRae, one of the world’s best economic journalists, declared in The Independent that “Hardly anyone a year ago successfully predicted the rise in the oil price to $120 a barrel — in fact, I have not found a single forecast of that.” Regular readers of this column may recall that I predicted oil at over $100 a barrel in April, 2006, and well north of that price in another column in July, 2007.

I am the most modest of men, but I reckon this gives me the right to offer some further forecasts. So I predict that the price of oil will soon fall — a bit. So far, the economies of the “Brics” (Brazil, Russia, India and China) are still growing strongly, but the old industrialised economies are definitely heading into a recession, and they still consume most of the oil.

This recession has not actually been caused by the high oil price; the sub-prime mortgage scam is to blame for that. But the recession is likely to drive the demand for oil down far enough to bring the price back down to $100 before long, or even to $85 or $90. Then in 2009-2010, as the “old rich” economies recover, it will go back up, probably to the $130 to $150 range.

The price will rise because demand will recover much faster than supply can grow, if indeed it grows at all. A supposedly giant new oil field has been found off the coast of Brazil, but even if it lives up to the advertising it is five to 10 years away from large-scale production.

The world’s largest oil producer, Saudi Arabia, admits that there is now not enough spare capacity among the Opec (Organisation of Petroleum-Exporting Countries) producers to make any difference. Russia, the biggest non-Opec producer, will probably see production fall this year.

And practically everybody else is already pumping flat-out.

So once the recession ends, the price of oil will probably stay at about $100 for most of the time in 2010 to 2015. But it won’t hit $200, because there will be a steep rise in the supply of non-conventional oil from tar sands, oil shales and other sources of “heavy oil”.

Even if the moment of “peak oil” is upon us, that would not mean the end of oil; it just means the end of sweet, light crude.

The Alberta tar sands are profitable if the price of oil stays over $40 a barrel at $60, the far larger Venezuelan tar sands are a viable economic proposition. At $80, even the oil shales of the western United States are promising.

In a world with a stable climate, ample unconventional oil supplies would bring the oil price down below $100 again, but that’s not the way it’s likely to play out. By 2015, global tolerance for any process that involves high emissions of greenhouse gases is likely to be very low.

Indeed, there is likely to be a good deal of pressure to cut back on the consumption even of conventional oil.

Five years ago, global warming was a distant worry in most of the world, and in North America, where the denial industry had its headquarters, it was widely disbelieved. Now it is a high-priority concern in Europe, in the U.S. (at every level below the White House, where change is coming shortly), and in China, and a rapidly growing worry everywhere else.

Go seven years down the road, and throw in a few dozen more climate-related catastrophes like Hurricane Katrina or the killer heat wave in Europe in the summer of 2003. What will popular support for burning fossil fuels be in 2015? Not very high, one suspects.

Several billion people live in countries that are now growing very fast economically, so demand will probably keep the price for conventional oil near the $100 level well into the 2020s, but the political pressure to shut down extra-high emission unconventional oil production may become irresistible. (That’s why the Alberta tar sands producers now want to replace natural gas with nuclear power as the energy source for freeing the oil from the sand.)

In the still longer run — the 2030s and beyond — the demand for oil will probably fall even further, and with it the price. How do we know that? Because if it hasn’t fallen due to a deliberate switch away from fossil fuels, then global warming will gain such momentum that entire countries will fall into chaos instead. Theis more than one way to cut demand.

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