The Hindu Business Line : ‘Peak’ oil’s scary prospects

From single digits in the late nineties, oil has climbed to close to $150 a barrel in recent days. At around $70 about a year ago, it actually was cheap.

Not that the price doubling was linear. It took place with a series of alternate up and down moves. But over time, the trend was unmistakeably much higher.

So here we are, well into sustaining three digit prices. Is there any hope that oil will moderate and come down to more earthy affordable levels?

Matthew Simmons, a US oil expert, thinks there is no chance. He is the author of an extraordinarily well-researched book Twilight in the Desert: The Coming Oil Shock and the World Economy, that caused shock waves in the energy world. He has meticulously gathered data on the world’s biggest oilfields and finds just over a hundred account for half the world’s production. These are being overexploited to maintain current production levels. Simmons sees production levelling off in the near future — he estimates a 10 to 15- year window. If consumption grows at the present rate, there just will not be anywhere near enough oil and the shortfall between potential demand and supply could be as high as 50 per cent with all the frightening implications it has for price.

Simmons’ case for ‘peak oil’ — the phrase describing production reaching its limit and declining thereafter — has support from analysts in Goldman Sachs, who first predicted the price ‘super spike’ to $100 and then $150.

In Congressional testimony, when asked what would be the right price in current demand-supply conditions, Exxon’s Chairman put it around $70-80.

There’s fodder for conspiracy theorists as well. Every time, the price has threatened to break on the downside, a price prop — an oil pipeline attack by Nigerian rebels, Iran test firing missiles, a toughly-worded OPEC statement or a North Sea platform shutdown — pops up. The current Damocles sword hanging on the market is the hurricane season, which can disrupt and damage US production platforms.

There is every chance of a sharp price fall in coming months on weak global economic conditions and shrinking demand for transport fuel — less driving, the switch to small cars and public transportation.

The market has not discounted the prospect of a successful nuclear agreement with Iran and peace between Israel and the Arabs either.

For the long-term, Simmons is probably right. Both the rich and emerging economies, therefore, need urgent market and policy responses.

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