China are increasing the consumption of energy

Tag : Kinds Of Spices
MICHAEL CASEY
Oil price is increasing all the time because of the great demand, but there are also other reasons. WHAT KIND of company persuades its customers to consume less of itsproducts; spends great swathes of its money on items unrelated toits core business; doesn't manufacture the products it sells; andat a major triennial convention, does not display any of itsproducts on any of the hundreds of exhibition stands?
Answer: a petroleum company, of which there are three kinds. Thefirst are the super gigantic multinationals like ExxonMobil,Chevron, Shell and BP. The second are the nationally-ownedcompanies (NOCs) such as Qatar Petroleum, Petroecuador and Aramco.The third category includes the independent oil companies (IOCs)such as Broken Hill, Enserch Exploration, Union Pacific and so on.
All say they want their customers to consume less oil and gas; allclaim to spend a lot on the environment; none of them manufacturesthe products as such (they extract and refine them); and, despitehundreds of exhibition stands with various items on display, therewas not one drop of oil or cylinder of gas to be seen at the recentWorld Petroleum Congress.
The oil and gas business is unique in many other ways as well, someof which will become apparent later on.
This was the 19th congress at which these companies had cometogether to talk, present their case to various governments - andindeed to the world. Not all of it was hype and there was certainlya feeling of genuine scientific inquiry in the meetings held bygeologists, engineers and independent academics. They oftendisagreed among themselves - a sure sign of truth-seeking.
The administrative chiefs of the oil companies tended on the wholeto sing from the same hymn sheet - always a little worrying forthose who believe in the benefits of competitive forces. There wasa substantial degree of consensus about the following: the recentalarming oil price rises were not caused by financial speculation -the financial wünderkind were simply "following" thefundamental forces of supply and demand. One Kuwaiti womanquestioned this from the floor and was given a long and severelecture from the podium.
No speaker suggested that financial speculation could beexacerbating the price rise through the familiar mechanism of"over-shooting". For some reason, the oil chiefs wanted to focussolely on the fundamentals of supply and demand. They argued thatthe main reason for the surge in demand for energy was the rapideconomic growth in countries like China and India.
The problem is made worse by the existence of oil subsidies inthese and other developing countries.
On a per capita basis, the demand for oil in OECD countries isactually falling slightly, though from a high level. The averageconsumption of oil per head per year in the OECD area is 17barrels, compared with two barrels in China.
The fear is that developing nations will become asenergy-profligate as developed nations.
Why should oil-producing companies worry about growing demand fortheir product? Don't they get to sell more at higher prices? Yes,but there is a snake in that fool's paradise. It is the fear of"demand-destruction" - if the price goes too high, people willslash their consumption and turn to alternative sources.
At present, the world consumes 81.5 million barrels of oil everyday. Proven reserves of oil are estimated at 1,238 billion barrels.
At this rate, those reserves should be able to keep the world goingfor about 40 years. The equivalent figure for gas is about 70 yearsand our old friend coal, which is making a comeback, is good forapproximately 150 years. Geologists and engineers claim there aregood chances of significant discoveries in the Arctic, Russia(mainly natural gas) and Brazil. At the congress, they said thatrefining technology could be improved so that we can get up to 15per cent more refined product out of the same volume of crude.
There wasn't much discussion of "peak" oil, which is, apparently, afuzzy concept. There might be a "plateau" for a few years at afairly comfortable level of 95 million barrels a day. Moreover, alot of natural gas should be coming on stream. And, as well astransporting it by pipeline, it can now be liquefied and shipped bytanker.
So where is the problem? If reserves are comfortable, why areprices rising at such an alarming rate? It was summarisedsuccinctly, but elliptically, by the chief executive of BP. "Theproblem is not speculative or geological, but political."
Another insider was even more coy, saying that most of the problemswere "above ground". We got a bit closer to the truth when anotheroil chief referred to "rising resource nationalism".
What all these euphemisms mean is that big companies just can't gointo sovereign countries any more, grab the oil and gas, and leave.In the past, there were plenty of examples of large oil giantsdamaging the environment of countries like Nigeria - and leaving awhiff of neo-colonialism in the already-polluted air. Morerecently, we had a case in this country where six men were jailedfor several months.
At present, the countries that won't play ball with the oil giantsinclude Venezuela (under Hugo Chavez), Nigeria and Iran. Even theRussians are backing out of some of their earlier deals with theoil giants.
Hardly anyone mentioned Iraq, or the fact that the US could beusing high oil prices to pay their war debt as a more politicallyexpedient method than raising the taxes of American citizens. Everytime we put fuel in our cars, we are probably paying for the war inIraq - a disturbing thought. The fact is, oil output from Iraq fellto one-third of what it was before the invasion and one-fifth ofwhat it could now be. Fortunately, some Iraqi oil wells arecurrently being brought back into more regular production and thereis talk of the discovery of a new field in the western desert ofIraq.
There is also the issue of OPEC countries wishing to keep the oilin the ground. They reject this and claim they are happy to pumpmore oil - at the existing high prices of course and certainly notso much that prices would fall. They do have massive reserves -especially Saudi Arabia. But if they want to leave most of it inthe ground for their children, as is widely rumoured, what can theoil companies do about it except make them an offer they can'trefuse? And all that will do is serve to push costs up.
Then, continuing our global tour, we come to Russia, which, as faras natural gas is concerned, has the whip hand and is not going togive it away. The newly-appointed president Dmitry Medvedev wantsGazprom to be the world's biggest company by 2017, and hiscolleague Vladimir Putin expects oil output to rise by almost 14per cent by 2015.
As Dan McLaughlin outlines in the next article, Putin has committedhis government to cutting taxes for oil firms and introducingincentives for exploration. And in Medvedev, he has an ally whoknows the needs of the oil and gas industry - before becomingpresident, he was chairman of Gazprom.
Shoot over to the US and there is very limited exploration goingon, largely due to the fact that permits can be blocked by localsand by NGOs. In summary, oil production and international politicsare intertwined in a dangerous and damaging way.
Leaving aside conspiracy theories involving the US, Saudi Arabia,Iran and Israel, what has really happened is that the big oilcompanies now have to negotiate with countries and regions outsidethe aforementioned established few to get at the oil and gas. Andthese new countries are not prepared to be pushed around. So, eventhough reserves are adequate globally, oil companies are going tohave to give better terms to the countries in question.
In the meantime, while we wait for deals to be agreed and rigs areput in place, it's likely that prices will stay on the high side.Even when the oil and gas is being extracted, it is likely toremain quite expensive, because the oil companies will have had tooffer fairly attractive terms to the new - business savvy - hostcountries.
Then there are the rising costs of extraction. There is areasonable degree of consensus that costs in the oil industrygenerally are rising by about 20 per cent annually. (For specificreasons to do with forward contracts, Shell is below that figure.)
So, even if supply and demand do come into better balance and evenif the over-shooting caused by speculators abates, we are stilltalking about high cost oil and gas in the future. So to turn tothe governments: what can your country do for you at the pumps?
Well, get in line. It's not just truck drivers and fishermen thatare knocking on government doors for help over oil.
In one of the great twists of fate, the big oil giants, oncearchetypal private-sector entities, are now pleading for help - andfor subsidies. More than anything else, they want certainty. Thisis because the investments they must make in exploration andrefining oil are enormous, even for oil companies with plenty ofcash and resources.
The days when small countries like Ireland virtually gave awayexploration rights are long gone. Suppose the government of thehost country changes, and seeks to nationalise its own oil or gas.Where would that leave the company that made the huge investment?Suppose the finds are not economical or the lead times and pay-backperiods too long?
These are high-stake risks, similar to those faced by earlyprospectors. Speaking to oil company chief executives these days,it's hard to avoid the impression that some are frozen in theheadlights. These are not the risk-taking prospectors of old, butcautious accountants more used to trimming costs than going forbroke. One of the most serious aspects is that the big oil firmsare actually doing very little exploration: most of that isundertaken by the NOCs and IOCs.
One chief executive revealed to us that his company outsourcedalmost everything - even corporate strategy. Whether governmentscan give any help or reduce the risks in any significant way is amoot point.
It seems that the countries with the reserves don't have thetechnology - and the companies that have the technology don't haveaccess to the reserves. So, is there a danger that drilling for oilwill be seriously scaled back? One could envisage a geo-politicalsituation in which this could happen, but the odds of this areslight. Even if the oil giants pull in their horns, the NOCs andIOCs will undoubtedly fill the gap. One major problem for the bigoil giants is the greying factor. Senior staff are ageing and theindustry is finding it difficult to attract young professionals.Young people don't find the industry sexy. Even the physical imageof huge refineries and rows of large, ugly tanks is off-putting.Most people see it as an "old" industry and not really part of thenew "information" economy, which is largely based on services.
Is it possible that the people speculating on oil prices are theyoung "quants" who, in a former age, might have gone into thepetroleum sector? In most developed economies, the financialservices sector is the fastest growing one.
However, these are corporate and political issues that partlyreflect the state of the industry and the reason it struggles toquell the rising prices and risks to their business that areinherent within that. They are well discussed between all thefirms.
However, the phantom elephants in the room whenever oil executivesmeet are science and innovation. Suppose over the next few yearssome innovative young engineer or physicist develops a really goodenergy alternative, or perhaps a means of leveraging the knownalternatives - what would happen the mega oil companies?
Maybe they have contingency plans, but they certainly don't talkabout them. Not openly and between one another at the WorldPetroleum Congress, anyway.
Presumably they would try to buy out the genius inventor at anearly stage. However, there is no doubt that if oil prices continueto rise sharply, the push to find cheaper alternatives will beaccelerated to an extraordinary degree. This "demand-destruction"is what the companies fear.
The process is commonly known as economic adjustment, and it hasworked well throughout history. When spices became scarce and theEastern countries cartelised the spice trade, Columbus set out onhis voyage. He didn't find many spices, but eventually other meanswere discovered to keep food fresh for longer periods of time.Price signals are extremely powerful.
After the first oil shock in the mid-1970s, no one thought the USwould or could produce smaller cars, but they did. The world isalready working on five or six alternative forms of energy. And thepush towards energy conservation is increasing daily.
The oil companies are right to fear "demand-destruction". Andthough it seems rather masochistic to say it in today's developedsocieties, it could be in the world's interest if prices wentthrough the roof, despite the pain. If you have confidence in theinnovation and inventiveness of humans you will believe thatcheaper, sustainable alternatives would undoubtedly be found,sooner rather than later.
The present difficulties are worrying, but not on a par with thefirst oil crisis of the mid-1970s, when the price of crude oilquadrupled virtually overnight due to the actions of OPEC, whichhad more monopoly power than it does today.
That crisis plunged the world economy into recession and causedgeo-political problems which remain with us today.
One could argue that the seeds of the Gulf War and the subsequentinvasion of Iraq were sown back then. Unfortunately, oil andgeo-politics are inextricably linked and there are severalconspiracy theories doing the rounds involving America and Iran.It's a time for cool heads and reasoned debate. It is also time fortransparency from the US.
In the mid-1970s, OPEC countries amassed huge sums of cash, andbanks recycled most of it by lending to developing countrieswithout doing any sovereign risk analysis.
This led to the massive financial crisis of the early 1980s. Thebanks are already in serious difficulty and it is to be hoped thatif and when the latest oil revenues find their way into theircoffers, they will handle the funds sensibly. But there is a riskthat they will not.
There does not seem to be a pressing problem regarding energyreserves, and gas finds are regularly made, especially in Russiaand Iran. Technology is increasing the yields of refineries.
The problem on the demand side is that China and India are growingfast and increasing their consumption of energy, especially as itis subsidised in those countries.
The problems on the supply side are partly due to speculativeover-shooting, geo-political factors (including the Iraq war), aweakening of the power of the giant companies vis-a-vis nationalgovernments and, possibly, a desire on the part of OPEC to keepmost of their reserves in the ground for their children.
An additional issue may well be the record of bad treatment metedout by the oil giants to various host countries in the past. Putinrefers to some of the deals done by oil companies with Russianauthorities when the country was financially unstable as"colonial".
The lack of skilled young people in the oil industry does not augurwell, nor does the fact that the big companies are the mostreluctant to engage in risky exploration.
The problem is not a long-term one, since the reserves are there;it's a medium-term one which is both cyclical and structural. It isnot clear what governments can do, but some kind of internationalsummit is called for. An international body, engaged full-time inenergy R&D might be a possibility. Certainly, the search forviable renewables should be considerably speeded up.
If this happens, and is seen to be successful, the oil companiesmay have to start pumping more oil quickly because leaving it inthe ground won't be of any use if renewable alternatives come fullyon stream.
They may of course buy up the renewable companies and achievediversification by that route. There is likely to be majorrestructuring in the energy industry in the years ahead. One couldalso not rule out an increase in government-run energy companies onthe grounds that the private sector is afraid to make such riskyand high-cost investment decisions.
Ireland is still far too reliant on imported energy and, althoughwe've made a good start on wind energy, it's disappointing that wehaven't made more progress in relation to wave and tidal power.
Our first major warning about energy came in the mid-1970s. Eventhough the present recession in Ireland is largely of our ownmaking, there can be little doubt that world energy prices willworsen the situation for the next couple of years and may evenpostpone our hoped-for recovery.
Dr Michael Casey is a former senior official with the Central Bankand a former member of the board of the International Monetary Fund
© 2008 The Irish Times