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So that's it, then. The Third Great Oil Boom is done. The price of crude has dropped from its recent peak of over $70, and that has a lot of smarty-pants thinking that the oil bubble of the early part of this decade has played itself out.
No wonder. The geopolitical pressure on prices has subsided since this summer, when Hezbollah and Israel fought it out in southern Lebanon. U.S. crude inventories have been on the rise, and Big Oil in 2005 posted the first reserve improvements in several years. New deep-water discoveries in the Gulf of Mexico could see U.S. domestic reserves notched up by as much as 50%, which would do much to offset declining domestic production. Meanwhile, the possibility that new supply could come online from Iraq, where the U.S.-installed government says it wants to increase production to 4.7 million barrels a day from the current 2.5 million, is still looming in the background. "The next promising source of oil is Iraq," Shin Hosaka, director of the oil and gas division at the Trade Ministry in Japan, said recently at a press conference to announce Japanese investments in Iraqi oil infrastructure.
Last but not least, the oil industry has come out swinging against Peak Oil theorists, those individuals who think the world is about to hit a peak in terms of fossil fuel production. Apparently all the talk was getting a bit out of hand, so the industry has decided to talk back. Abdallah Jum'aah, the CEO of the big Saudi state-owned firm Aramco, recently stated publicly that the world has 4.5 trillion barrels of fossil fuel reserves, enough to power the globe at current levels of consumption for another 140 years. The CEO of Exxon Mobil Australia told an industry conference in Adelaide that "the end of oil is nowhere in sight," while here in Canada Clive Mather, CEO of Shell Canada, has pointed out that methane hydrates are so abundant on earth as to make the question of fossil fuel depletion moot.
So, it's time to sell those overheated energy stocks then? Well, not quite yet. Sure, there may be lots of hydrocarbons in the ground (or under the sea as is the case with methane hydrate), but the question of who is going to have access to those reserves and at what price is still very much up in the air. That's especially true as China ascends. Russia recently indicated that gas that was to flow to the United States from the new Schtokman gas field would be sent to China instead, as that country rapidly becomes a huge consumer of fossil fuels. In 2003, China became the second largest importer of oil after the United States, with daily imports of 6.5 million barrels. That number is expected to rise by about a million barrels a day every year, as oil comes to account for over 50% of China's energy needs, up from just 29% in 2000.
Much of that demand will be met by the Middle East-Saudi Aramco expects it will supply Chinese oil company Sinopec with one million barrels a day, double the rate it currently supplies, prompting Aramco CEO Jum'aah to state that the China-Saudi Arabia connection "is one of the world's most important energy relationships."
The West isn't the only player anymore. And though it uses a disproportionate share of the world's oil — the United States, with 4% of the world's population, uses a quarter of the oil produced each day in the world — the West is going to have to learn to share.
This was made clear to Europe recently in the run-up to scheduled talks with Russia on energy security. Russia is the main supplier of oil and gas to Europe. Ahead of the meeting, Angela Merkel, chancellor of Germany, Russia's biggest gas customer, said she wanted Russia to break down barriers to its energy markets and assure the European Union that contracts signed between the two could be trusted.
The worry over how to approach Russia on energy questions was reportedly so intense that European officials argued for hours before the meeting about who would ask Vladimir Putin the questions at the scheduled dinner. In the end, it didn't seem to matter who asked. The Russians are in the driver's seat, and they know it. "It is unnatural to subsidize countries and their economies. We have been doing this for 15 years through offering low price energy," Vladimir Chizhov, Moscow ambassador to the EU, said ahead of the meeting. "Now, the EU tells us to bring internal domestic prices in line with world prices. But that can't happen overnight or the Russian economy will disappear." The cost of energy is going to be what Putin says it is; net energy consumers have little recourse to complain. They're also likely to have even less information than they have had in the past about the prices they'll be paying.
Last month, a meeting of the Extractive Industries Transparency Initiative took place in Oslo. The initiative is an attempt to "develop voluntary reporting standards that would hold governments and oil companies to account over how much they are paid for their resources." That would help keep clear up the question of where power and interest are moving in the world. But it doesn't look like the Western nations behind the initiative are going to have much luck getting the rest of the world to buy in. Speaking to the Financial Times of London, Joseph Stanislaw, an oil industry consultant, was quoted as saying that few net producers will take part in the initiative. "Why should they give up their advantage by making public their energy data?" asked Stanislaw. "Energy is a tool of foreign policy. When prices are high, it becomes even more essential for those who have it to keep control of it and its data as a tool of wealth and influence."
You don't need to be running out of oil for the price of oil to rise. Natural human anxiety security will take care of that. Iran has just taken the next step in its uranium enrichment process, putting the conflict between the U.S. and the Shia-led government of that resource-rich country back on the front burner. As Iraq seems to fall further into open civil war, the idea that the Shia-dominated south (which sits on the biggest reserves) might end up aligning with Iran is an outside possibility.
At the same time, the U.S. dollar monopoly as the currency of choice in oil markets may be ending, setting the stage for big declines in the greenback, and big increases in the price of a foreign barrel of crude in the States. In fact, some have speculated that the Euro has already replaced the dollar as the benchmark currency, and point to the fact that although the price of oil denominated in US dollars has risen, the price of a barrel of crude stayed fairly stable in Euro-pricing-it has remained between 24 and 28 Euros and the price of gas in Europe has actually dipped below what the U.S. price.
Sure, industry execs may be talking down Peak Oil, but there's lot of reasons to think the price is still headed higher. It's worth noting that Bill Clinton recently addressed the Association of Alternative Newsweeklies and urged editors there to focus more attention on the issue of oil reserve depletion. According to Clinton, stats from the International Energy Agency suggest a peak of "recoverable oil" 35 to 50 years out. That's a long way off, sure, but that's not the point. The very fact a peak of traditional oil is in the picture elevates the risk of "resource-based wars of all kinds," said Clinton. "Everybody I know who knows anything about this business believes it'll be $100 a barrel in five years or less."
In line with that prediction, the well-respected Bank Credit Analyst, a Montreal-based investment research company, suggests holding the stocks of big integrated oil companies as the world works out reserve issues, a shift to other fuel supplies and all the geo-political challenges that go along with that (as well as the currency issues). As for the promise of methane hydrates, the technology to process them is generally considered a decade into the future. So we've got way to go yet. "Energy stocks are stretched by historical standards, but have not yet reached the relative extremes that the tech sector achieved in the late 1990s," reads a recent BCA report. "The upshot is that another leg in the bull market is probable as valuations expand, given our view that energy is this decade's mania candidate."
Think hard before bailing out on the oil boom.
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