The Current Oil Shock
No Relief in Sight
By Dilip Hiro
When will it end, this crushing rise in the price of gasoline, now
averaging $4.10 a gallon at the pump? The question is uppermost in the
minds of American motorists as they plan vacations or simply review
their daily journeys. The short answer is simple as well: "Not soon."
As yet there is no sign of a reversal in oil's upward price thrust,
which has more than doubled in a year, cresting recently above $146 a
barrel. The current oil shock, the fourth of its kind in the past
three-and-a-half decades, and the deadliest so far, shows every sign of
continuing for a long, long stretch.
The previous oil shocks -- in 1973-74, 1980, and 1990-91 -- stemmed from
specific interruptions of energy supplies from the Middle East due,
respectively, to an Arab-Israeli war, the Iranian revolution, and Iraq's
invasion of Kuwait. Once peace was restored, a post-revolutionary order
established, or the invader expelled, vital Middle Eastern energy
supplies returned to normal. The fourth oil shock, however, belongs in a
different category altogether.
Nothing Like It Before
Unlike in the past, the present price spurt has been caused mainly by
global demand for energy outstripping available supply. Alarmingly,
there is no short-term prospect that supply will match demand. For a
commodity like petroleum that underwrites and permeates every aspect of
modern life -- from fuel to fertilizers, paints to plastics, resins to
rubber -- "balance" requires a 5% safety factor on the supply side.
At present, however, spare capacity in the oil industry is less than 2%,
down from more than 6% in 2002. As a result, the price of oil responds
instantly to negative news of any sort: a threat against Iran by an
Israeli cabinet minister, a fire on a Norwegian offshore drilling rig,
or an attack on an oil facility by armed rebels in Nigeria.
Behind the present price surge, other factors are also at work. Take the
sub-prime mortgage crisis in the U.S. It flared almost a year ago,
drastically lowering the market value of the stocks of banks and allied
companies. The concomitant downturn in other equities led investment
fund managers and speculators to direct their cash into more productive
markets, especially commodities such as gold and oil, driving up their
prices. The continued weakening of the U.S. dollar -- the denomination
used in oil trading -- has also encouraged investment in commodities as
a hedge against this depreciating currency.
The earlier oil shocks led non-OPEC (Organization of the Petroleum
Exporting Countries) nations to accelerate oil exploration and
extraction to increase supplies. Their collective reserves, however,
represent but a third of OPEC's 75% of the global total. By the turn of
the century, these countries had pumped so much crude oil that their
collective output went into an irreversible decline.
A mere glance at the oil production table of the authoritative BP
Statistical Review of World Energy -- published annually -- shows
declines in such non-OPEC countries as Britain, Brunei, Denmark, Mexico,
Norway, Oman, Trinidad, and Yemen. Over the past decade, oil output in
the U.S. has declined from 8.27 million barrels per day (bpd) to 6.88
million bpd.
The exploitation of the much-vaunted tar sands of Canada -- expected to
cover the global shortfall -- only helped to raise that country's output
from 3.04 million bpd in 2005 to 3.31 million bpd in 2007, a mere 10% in
two years.
In the 1990s, overflowing supplies and cheap oil had led to an overall
decline in oil exploration as well as under-investment in refineries.
These two factors constitute a major hurdle to hiking the supply of
petroleum products in the near future.
In addition, new hydrocarbon fields are increasingly found in deep-water
regions that are arduous to exploit. The paucity of the specialized
equipment needed to extract oil from such new reserves has created a
bottleneck in future offshore production. The world's current fleet of
specialized drill ships is booked until 2013. The price of building such
a vessel has taken a five-fold jump to $500 million in the last year.
The cost of crucial materials -- such as steel for rigs and pipelines --
has risen sharply. So, too, have salaries for skilled manpower in the
industry. Little wonder then that while, in 2002, it cost $150,000 a day
to hire a deep-water rig, it now costs four times as much.
full:
http://www.tomdispatch.com/post/174955/dilip_hiro_the_energy_reality_we_face
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