Posted on 11/25/2007 2:51:23 AM PST by familyop
With world oil prices nearly touching $100 a barrel in the past week, we are living through the third great energy shock of the post-war era. But this time, demand from India and China means that prices are unlikely ever to go down again.
Since 2004, oil prices have risen on a scale similar to that of the first oil shock at the start of the 1970s, and double that of the second oil shock at the end of the 70s.
China's oil consumption has doubled over the past decade and India's has increased by two thirds.
A new Australian study says the problem in the two earlier oil shocks was with supplies of oil. This time, study author Professor Michael Wesley says, the problem is that demand is unlikely to subside.
"The growth in the consumption of oil and oil products by predominantly the United States, China and India is rapidly outstripping the ability of the oil market to supply those amounts and this will inexorably drive up the price of oil," he said.
Professor Wesley predicts that this time, the prices won't drop back.
"The previous two oil shocks in 1973, 74 and in 1979-1980 were supply-side shocks," he said.
"They were generated by the inability or the unwillingness of key suppliers to put adequate supplies of oil onto world markets.
"Now they were stopped and stopped reasonably abruptly when the suppliers simply restored supplies to world markets.
"There are supply-side problems this time, but even if all of those problems are resolved tomorrow, the demand-side pressures will continue to grow and will continue to put upward pressure on oil prices."
He says this time, rising demand in the growing economies of India and China and other countries in Asia means that higher prices will just continue.
"To give you an example, sales of cars in China are rising by 25 per cent, year on year," he said.
"There are expanding middle classes in both countries, in both China and India, and they are demanding lifestyles and modes of transport that are using modern energy.
"By modern energy, I mean both oil and oil products, gas and electricity - all of which are fossil-fuel-produced.
"So there will be an inexorable rise in demand for these products and it will continue to put upward pressure on prices."
Security, war implications
Professor Wesley predicts Asian countries will start factoring energy into their security calculations, but does not see oil wars on the horizon.
"I think the major powers of Asia certainly are starting to factor energy into their calculations, but they have also made the judgment, I think, that this is not something that any one country can do on its own," he said.
"Even if China were to use its military force highly effectively and try and sew up large parts of the oil-producing regions of the world for its own consumption, the energy economy is so intertwined with the broader global economy that the powers of Asia realise that it is best managed via the market and that the oil market and the energy markets will have flow-on effects to other international markets as well.
"So it is simply not possible, or it's simply self-defeating for any one country to try and think that it can solve all of these issues for itself and by itself."
He argues that neither India nor China will give in to economic nationalism and seek to assert themselves: they will rely on the international market instead.
"I think both countries have already ultimately made the judgment that if they act too aggressively on world energy markets it starts to set up countervailing reactions," he said.
"The Chinese in particular are very, very aware of international perceptions of their rise, and they're very worried that if there are international reactions of fear about China's rise and China's aggressiveness on world markets, it could set up countervailing reactions that starts to limit what China can do in the global economy, be it the energy economy or the broader economy."
China's 'perception management'
Professor Wesley says China knows it needs to be subtle in the way it goes about its energy market purchases.
"A good example of that was when one of China's biggest oil companies, CNOOC [China National Offshore Oil Corporation] tried to takeover the US oil giant, Unocal [Union Oil Company of California]," he said.
"In the face of major opposition from the US Congress, it quietly withdrew the offer, and I think perception management was a very big part of that."
He says Asian countries are recognising the importance of energy security alongside national security, military security and economic security.
"The great powers of Asia, the great energy consuming powers of Asia - Japan, China, India - are starting to take a much greater interest in broader diplomacy, particularly into oil-producing regions," he said.
"The upsurge in creative diplomacy from these three countries into the Gulf region, into North Africa, into West Africa, into Latin America, has been noticeable in previous years and it will continue."
Professor Wesley notes that these are regions in which the United States has been the paramount power until now.
"One of the issues that we are going to confront, I think, is how the United States reacts to this: how it reacts to other diplomatic suitors coming into regions of its predominant power," he said.
Things are happening in the world and a lot more will be happening. At the moment production is meeting consumption and the pipelines are full so there is some slack in case of crisis.
I am not opposed the E&P at ANWR. However, even if ANWR were to produce 1.4 million barrels per day it would account for only 6.5% of our daily domestic consumption. And while that may initially offset the price of oil the world oil marker would absorb the additional oil increasing prices to today’s levels.
The solution is not only ANWR but more E&P I the lower 48 and conservation which will only slow the increase of the price of oil.
This is why we WON’T be doomed by Anthropogenic Global Warming from burning fossil fuels. As the prices rise, people will naturally begin to conserve, thus putting a brake on carbon emissions.
Just simply let people develop these resources, then, as they get used, the price goes up, and people start to conserve, reducing the carbon emissions.
I’d like to thank the free-traders for the largest increase in oil demand; propping up 3rd world economies into oil consuming 3rd world economies.
No new nuclear plants or refineries for over 30 years. We have 250 years worth of cheap coal, an energy source free from OPEC and disruption by war, ready for gasification.
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Correct. During WW2, half of Germany’s oil consumption came from coal-oil conversion.
Conoco will be importing diesel to Prudhoe Bay rather than upgrade their existing plant to meet new enviro guidlines. $300 million project cancelled.
Welcome to the future of Alaska with the increased oil taxes.
Great news for a Monday morning and BTW no bidders yet for the TransAlaska Gas Pipeline although the spurline to Anchorage has one already.
Send Al Gore on a lecture series to China and India.
I have been to some investor meetings in the Boston area. The investors very much are focused on the Hydrogen opportunity as a 5-10 year play. They also are digging solar and biodiesels but not as much as you would expect. Probably because the funds in the Boston community have become massive, so the investors are looking for the next Google of energy and Hydrogen certainly looks like a winner in that regard.
Good point RayChuang. They have a working exhibit of this at the Museum of Science in Boston. LOVE IT.
Yeah I am not too happy about where the economy is headed. However, it taking ‘generations’ is not true at this point. US Investors are confident OPEC can no longer control the price through simply flooding the market to reduce price as it once did.
As you stated, energy demand is going through the roof (as is the price of course). Your talking about a total of 20 years to be totally energy independant and I will say withing 10 years we will be importing 30% (or half) the oil we do now.
At that point, the reduction in US consumption will lower the price of oil. The real problem is the pain the middle class and poor will feel in the next five years. With the perfect storm for inflation, consumer confidence is already waning. The bummer is they may vote Hillery despite the fact the Clintons know very little (or don’t care) about real economics.
Given global demand, OPEC doesn't have the excess capacity to "flood the market." Only Saudi Arabia has about a 2 million bbls a day excess capacity above its OPEC cap. It is going to take generations to move us away from the internal combustion engine and a carbon based economy. There is too much capital investment to move that quickly from one source of energy to another.
As you stated, energy demand is going through the roof (as is the price of course). Your talking about a total of 20 years to be totally energy independant and I will say withing 10 years we will be importing 30% (or half) the oil we do now.
It will take much longer than 20 years, if ever, that we will be totally energy independent. I don't share your optimism. What do you base it on?
At that point, the reduction in US consumption will lower the price of oil. The real problem is the pain the middle class and poor will feel in the next five years. With the perfect storm for inflation, consumer confidence is already waning. The bummer is they may vote Hillery despite the fact the Clintons know very little (or don’t care) about real economics.
"While in Beijing there are still 2.4 million people who ride their bicycles to work every day, nearly 1,000 new cars hit the streets daily. China's roads are expected to be clogged with 170 million vehicles by 2020 says the World Bank -- by which time the country would have surpassed the United States in total car ownership."
"No one is doubting that more and more Chinese people are going to reach that threshold of affordability -- to buy their own car," said John Humphrey, manager of China operation for the U.S.-based car industry consultants J.D.Power Asia Pacific. "The pace of change we have seen in China's auto market is astounding but demand is still growing."
Seven million cars are sold in China each year. That means China this year left Japan behind to become the second-largest car market in the world after the U.S., where more than 16 million cars are sold annually.
You probably saw this, but I repeat it here just in case: Conoco will be importing diesel to Prudhoe. Since there is no pipeline going that direction, they will truck it up, which means burning diesel to get diesel there. From where they didn’t say.
There are a lot of relatives of Alaskans here, in Colorado. They drive and fly back and forth from there. Most of them are quite an environmentalist herd. And they love “de twees, de twees” (the trees)! They love them much more than people. ...goes all the way back to tree worship in Europe.
‘Yeah I am not too happy about where the economy is headed. However, it taking ‘generations’ is not true at this point. US Investors are confident OPEC can no longer control the price through simply flooding the market to reduce price as it once did.’
Given global demand, OPEC doesn’t have the excess capacity to “flood the market.” Only Saudi Arabia has about a 2 million bbls a day excess capacity above its OPEC cap. It is going to take generations to move us away from the internal combustion engine and a carbon based economy. There is too much capital investment to move that quickly from one source of energy to another.
I disagree. The same was probably said of the horse and buggy era and how in God’s name can we build all of those roads to support automobiles? Where will we get the fuel? Necessity is the mother of all invention.
‘As you stated, energy demand is going through the roof (as is the price of course). Your talking about a total of 20 years to be totally energy independant and I will say withing 10 years we will be importing 30% (or half) the oil we do now.’
It will take much longer than 20 years, if ever, that we will be totally energy independent. I don’t share your optimism. What do you base it on?
I base it on investments being made RIGHT now in the Boston VC community. It’s a 5-10 year ROI with big payoff for the Hydrogen economy. Honda has a Hydrogen car they are leasing next year, 100 vehicles for six hundred dollars a month. The technology is here and Honda plans for mass roll out (in other words becoming affordable to most consumers by 2012). GM is releasing the Volt, a complete electric car that will take you 40 miles on one charge, seat a family of four and go 65 MPH. There go to market is also 2012. Plus, I hear the pickup speed is awsome :)
Biodiesel investments are also rapidly scaling up with so many new viable technology to take almost anything and turn it into biodiesel. Coal liquification can supply all the heating oil the country needs right NOW. Do you think I am the only investor that has figured out you can make a killing when heating oil is $3.00 a gallon?!?
Automakers are creating flex-fuel engines to run on more ethanol, although I feel this is the least viable solution to become energy dependant. So with all of this, we will reduce consumption, my estimates are a reduction of imported oil by 30% over a ten year span.
‘At that point, the reduction in US consumption will lower the price of oil. The real problem is the pain the middle class and poor will feel in the next five years. With the perfect storm for inflation, consumer confidence is already waning. The bummer is they may vote Hillery despite the fact the Clintons know very little (or don’t care) about real economics.’
Here are population projections from the Bureau of the Census. By 2030 [23 years from now] the population of the US will have increased by 62 million or the rough equivalent of the current population of the UK. So we not only need to reduce our current demand but factor in new demand, which will be considerable. And then there is global demand:
“While in Beijing there are still 2.4 million people who ride their bicycles to work every day, nearly 1,000 new cars hit the streets daily. China’s roads are expected to be clogged with 170 million vehicles by 2020 says the World Bank — by which time the country would have surpassed the United States in total car ownership.”
“No one is doubting that more and more Chinese people are going to reach that threshold of affordability — to buy their own car,” said John Humphrey, manager of China operation for the U.S.-based car industry consultants J.D.Power Asia Pacific. “The pace of change we have seen in China’s auto market is astounding but demand is still growing.”
Seven million cars are sold in China each year. That means China this year left Japan behind to become the second-largest car market in the world after the U.S., where more than 16 million cars are sold annually.
No argument with any of that. Nations such as France and China are being shrewd with France relying on nuclear power and China quickly scaling out the next generation of pebble reactors. If we do not achieve full energy dependance within 20 years it will be because we do not also build out nuclear power. But that still would only leave us reliant on 30% of imports making supply and demand economics kick in and reducing the cost of oil. What moves do you see the responsible Arab nations making? They are investing heavily into hard assets of every type and some soft assets such as Wall St. :)
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