December 18, 2008 | Executive Summary on Energy and Environment
The global financial and economic crisis has caused an abrupt slide in energy prices, down to $40-$50 a barrel of NYMEX light sweet crude from the July 2008 highs of $147. While oil prices, along with other commodities, are expected to continue to fall in the short term, over the medium to long term, economic recovery is likely to generate growth in demand, and oil prices are expected to recover as energy markets tighten. Moreover, lower oil prices may also impede the massive investment needed to meet rising demand by 2030, delay introduction of energy-saving technologies, and make alternative fuels less competitive. The tight credit environment will also make it more difficult for energy firms to obtain the necessary funding for financing the capital-intensive capacity growth, especially for expensive and difficult offshore exploration and development, and heavy oil, oil sands or oil shale production.
As the recent steep fall in oil prices has illustrated,predicting the price of oil is a risky business. Goldman Sachs and Russia's Gazprom, which predicted oil at $200 to $250 a barrel, respectively, in 2008, were proven wrong. Yet, a number of trends are firmly in place that point to higher oil prices beyond the current recession, and are, indeed, transforming the global energy market: a massive rise in oil demand from emerging markets; a lack of OPEC and non-OPEC spare capacity to meet peak demand; a shift of influence over oil reserves and production from international oil companies (IOCs) to national oil companies (NOCs); an insufficient level of investment in production capacity; a decrease in discovery of oil fields; and a rising rate of oil field depletion. Making matters worse, there continues to be an increase in energy nationalism and the proclivity to use energy as a geopolitical tool.
The increase in demand for oil in China, India, the Persian Gulf states, and other developing nations remains the most significant phenomenon transforming global oil markets today. Rising internal consumption in key oil-producing states is also leaving less oil for export and is a significant constraint on future supply.
Overall, the projected rise in global demand between now and 2030 is staggering. Even correcting for the financial crisis, the likelihood that plans to increase crude oil production by 25 to 30 million barrels per day (mbd) by 2030, as the International Energy Agency forecasts, will be successful is not encouraging. With non-OPEC supply growth expected to increase slowly and contribute little in meeting demand by 2030, the burden will increasingly fall on OPEC. OPEC claims that its member countries already have the plans and investments to expand production capacity to meet demand in place. However, it has already failed to meet its 2006 capacity expansion targets and its members aresuffering from project completion delays.
In order to meet growing oil demand beyond the current crisis, the world will need much greater investment in the oil and gas sector. Non-OPEC and OPEC suppliers are not taking the necessary steps to facilitate this investment and are failing to meet production forecasts.
Moreover, the depletion rates of oil fields worldwide are rising, and new oil fields are not being discovered or coming online quickly enough to replace the existing production capacity. Depletion rates of the world's top oil fields range from 4.5 percent to 9 percent, roughly the equivalent of Iranian and Saudi annual production, respectively. (Even 4.5 percent is an enormous percentage and has major implications to future supply.)
With diminishing global spare capacity and the growing geopolitical potential for supply disruptions, it is time to confront anti-competitive policies by the OPEC and non-OPEC oil producers which block investment and foreign ownership of reserves. To increase and diversify automotive fuel supply, boost investment, open access to the remaining oil and gas reserves, and diversify the basket of transportation fuels, the Obama Administration and Congress, in coordination with international oil companies and other consumer countries should:
A tight transportation-fuel (petroleum) market is likely to return in the years ahead due to global demand, heightened political risks, and increasing resource nationalism by oil-producing governments. This perfect storm of supply and demand turbulence may have temporarily subsided, but two significant implications remain. First, oil-producing states will return to accruing more influence in the years to come, wielding the energy weapon, pressuring consumer nations, and placing constraints on the foreign policy options for the U.S. and its allies. Second, the world could face a major supply crunch by 2015. These trends are far-reaching and have major implications for national security and energy policies, and must be anticipated by the incoming Obama Administration.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. Owen Graham is a Research Assistant in the Allison Center.