A year of extraordinary upheaval has wreaked less damage than it might have done because of new technology, says Dieter Helmby Dieter Helm / March 20, 2012 / Leave a comment
Given the number of oil-producing countries in turmoil, and the fact that the world economy is now picking up momentum, why is the oil price not higher?
The possibility of military action against Iran later this year and the threats this may pose to the vital Strait of Hormuz might be expected to lead to panic buying and stock building. To make matters worse, there are still problems in Libya, Iraq is finding it difficult to build up production, and Syria is out of the market. Add the upheaval in Yemen, Nigerian civil unrest, and the damage President Hugo Chávez has done to Venezuela’s production, and things look pretty bad.
Then there is the recovery in the world economy. China—increasingly the dominant force in fossil fuel markets—is still powering along at over 7 per cent per year GDP growth. At that rate its economy will double in size by 2020. India has slipped back a bit, but is still at over 6 per cent per year. Overall the world is back at about 3.5 per cent GDP growth, the United States is recovering fast, and even Europe looks to have turned the corner.
If ever there were a combination of supply and demand problems, this should be it. And yet, here we are at only $120-$130 a barrel for North Sea oil, and around $100 for US oil—in real terms, less even than it was at the peak in 1979, when the developed world was much more energy and oil intensive.
Behind the hype and panic lie profound changes in global energy markets, in large part caused by the rising price of oil over the last decade. When the price goes up, demand is reduced; and substitutes thrive. It’s a process that takes time—and in those lags, all sorts of volatility are possible—just like we are witnessing now.
Think back to the late 1970s—the last time there was an oil panic. After years of complacency in the 1950s and 1960s, the margins between supply and demand tightened. The Opec cartel ramped up the price of oil by a factor of four, and then came the Iranian revolution, and the price doubled.
Failure to develop new resources, and failure to diversify away from the Middle East cost the west dear, but once price shocks occurred, the conventional wisdom of ever declining prices was replaced by an assumption that prices could only…