Thursday October 28, 2004

What if oil hits US$100 a barrel?

Comment
By Wong Sulong

OF late, oil has been hogging the news.

Governments, corporations and ordinary people alike are alarmed and concerned.

There is a feeling of hopelessness about the surging oil price.

What if oil hits US$100 a barrel, a friend asked me the other day, quoting a columnist in Forbes magazine who predicted that the commodity will be at that level in five years.

Well, I told my friend: If oil hits US$100, it will fall back to US$20, possibly even US$10.

But not before it triggers a world recession and give the United States a genuine reason to reshape the map of the Middle East (which was one of the reasons why it invaded Iraq last year).

Those who say the current high oil price is here to stay and will continue to move even higher put forward the following arguments:

·Oil producers are unable to increase their output to any great extent.

·Even if they can increase output, there is not much spare capacity left among the world’s oil refineries. It will take time to build new refineries.

·China and India have tilted the oil supply-demand equation. If the two economies keep on growing at the same rate of the past decade, world oil production will have to be raised by 43% by 2010 and three times in 20 years, said Stephen Leeb, a New York analyst and author of the book The Oil Factor.

I must say there is a lot going for the above arguments, but let me put forward the other side of the coin:

·The sharp rise in the oil price in the past year is a reaction to the low oil prices of the past decade. When one considers inflation and the depreciation of the US dollar, oil should not be selling at below US$20 a barrel – that was the case for much of the 1990s.

ll There is currently a small supply shortage because of increased demand (from China especially). It’s typical for commodities: a small glut depresses prices, and a small shortage causes prices to soar. Most analysts believe the current high oil price is temporary and point to share prices of oil producers which have lagged substantially compared to oil prices.

·It’s true China and India are consuming a lot of oil. But they are also consuming a lot more of other commodities, goods and services. These have not risen as fast as oil.

But here are some reasons why I believe the oil price will not stay above US$50 a barrel for too long, let alone at US$100:

(i) If the oil price stays above US$50 for more than a year, world economic growth will be stunted. This will lead to lower demand for oil (as well as other commodities) and prices will come down. If high oil prices triggers a world recession, demand (and therefore prices) for oil and other commodities will collapse.

(ii) If the oil price remains high, governments and consumers will take measures to cut consumption. Oil prices will fall very quickly.

(iii) High oil prices will result in more oil in the market in the medium term of one to two years. Producers will want to lock in their output at current prices, and new production facilities will be accelerated.

(iv) And so will be the development of alternative energy sources – nuclear, solar, wind, coal, and hydro. The world is not short of energy – it’s how much we are prepared to pay. For example, Australia has enough high quality coal to supply the world for 200 to 300 years. Add another few hundred years more if you take into account “brown” coal or coal with a high water content.

Canada and the US have heaps of shale –oil that is mixed with sand. This is costly to extract. But at the right price, you can have plenty of oil from shale.

Nuclear energy is the fastest, cheapest and cleanest energy source in the short term, and countries like China, Taiwan, South Korea and India are all going for it in a big way.

Oil producers know they cannot keep the current high price for too long. It’s against their long-term interests. But while it lasts, they are enjoying the ride.

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What if oil hits US$100 a barrel?

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