Oil prices to keep rising as demand grows

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.

"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."

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."

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.

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

There is no doubt that we will move from one source of energy to another. The only question is how much time will be involved in doing it and the transition costs involved.

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 :)

Sounds good. We have about 250 million cars [including SUVs and pickups] in the US and another 7 million trucks plus 6 million motorcycles. There is a lot to be replaced along with the infrastructure, i.e., gas stations, repair facilities, etc. And there are homes that rely on heating oil. I still find it hard to believe that this is all going to be done in 20 years. Starting when?

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.

Given all the hoops we have to go through to get a nuclear power plant approved and built, I wonder how many will actually be put on line in the next 20 years. I believe it takes about ten years from inception to production of energy.

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. :)

Many of the Gulf countries know that they are running out of oil and must put their money into other investments realizing that they need to replace the lost revenue. The Saudis have enough proven oil reserves to pump out 10 million bbls a day for the next 200 years. They will need the revenue because their population is exploding.

The US will move to other energy sources as a result of market forces. I would much rather see that than have some government mandated solution that could send us down the wrong road.

Good discussion. Too bad we didn’t get the message back in the oil crisis of the late seventies. We would be largly energy independant by now. Of course, OPEC at the time just flooded the market to reduce the cost per barrel and investors at the time bailed on alternative energy. This is more then a movement of or some new technologies that seem neat but never make it to market in eras past. I explained the part about ‘when’. Many electric and hydrogen vehicles will be on the road in 2012. But you are correct, 250 million gas guzzling vehicles will take some time to replace. With the electric car the Volt, no fueling station is needed. You plug it into an outlet overnight. With the Hydrogen vehicles, inventors have already built a home fueling box. I don’t think you’ll see too many ‘gas’ stations around 20-30 years from now.

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