For those who can remember the oil shocks of the 1970s, it all seems eerily familiar.
During that decade, the Organization of the Petroleum Exporting Countries employed stratagems to increase prices from about $3 per barrel at the beginning of the decade to $30 at the end.
Prices rose tenfold because of temporary oil supply disruptions.
More than 50 percent of the world’s proven oil reserves are located in North Africa and the Middle East.
Against a backdrop of commodity inflation and resentment against corrupt totalitarian regimes, their disenfranchised populaces are clamoring for revolutionary political shake ups.
Decades-old dictatorships in Tunisia and Egypt have recently fallen. Other undemocratic regimes in the area such as Libya, which control sizable global oil reserves, are fearful of the contagion spreading.
Saudi King Abdullah described the protesters in Egypt as “infiltrators who seek to destabilize their country.”
New or anti-Western regimes in these regions might use their newly found political empowerment to increase oil prices and/or might decrease production.
Iran’s Oil Minister of Petroleum Massoud Mir Kazemi, whose country holds the rotating presidency of OPEC, ruled out any need for the oil cartel to increase quotas even if prices hit $120: “While consumer countries are concerned about the effect on the oil price, there is no need to increase output to calm the market.”
Why should we be concerned about today’s high oil prices, approximately $94 (West Texas Intermediate) per barrel going even higher?
The International Energy Agency, or IEA, worries that surging oil prices might cause a global recession. Each of the latest three major global recessions has been preceded by a leap in oil prices.
What are the primary causes of higher prices?
In January, the IEA reported in its base-case scenario that the growth in demand for oil could surpass supply. Current world production is about 87.8 million barrels per day. The IEA raised alarms that the shortfall could reach millions of barrels daily.
Analysts from Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and JP Morgan Chase have all predicted that oil will rise to $100 per barrel in 2011 for the following reasons: a weak dollar, rampant emerging market demand, and political instability in North Africa and Middle East.
Why can’t oil supply be meaningfully increased?
First, there are geopolitical disruption threats surrounding key OPEC producers.
Second, OPEC might not even have significant spare capacity. In recent years the Saudis have appeared reluctant (possibly incapable) to increase production. A secret cable from a former Aramco executive (recently made public by WikiLeaks) suggested that Saudi recoverable reserves could be overstated by as much as 40 percent.
Third, the fear of another Deepwater Horizon disaster has delayed substantial explorations of ocean oil reserves, the largest potential source of oil outside of OPEC and Canadian oil sands.
On Feb. 15, Exxon Mobil Corp. released a report confirming that the company is hard pressed to maintain its reserves. The company admitted that during the past decade, for every 100 barrels it has pumped out of the earth, it has replaced only 95.
Other big oil companies share Exxon’s problems:
- The most accessible mega oil fields were discovered decades ago.
- There is limited ability to drill in many oil-prone regions, such as Russia, parts of Africa and the Middle East, due to politics and insurgencies.
- Opposition from environmentalists who oppose drilling offshore is growing.
Today, we are confronting an “earthquake” oil problem — not just a shock. Unlike the 1970s, the oil shortfall is permanent, not a temporary aberration.
New oil reserves cannot possibly meet increasing worldwide demand.
If OPEC used a temporary shortage to hike oil tenfold during the 1970s, what could they charge if we have a permanent shortfall?
Originally published in the Sarasota Herald-Tribune
