Will Oil Prices Ever Come Down Again?
The oil price has now tripled since the start of 2004, ending two decades of cheap energy. The oil market briefly paused for breath after a lone trader broke through the $100 barrier, but speculators are intent on pushing the price higher.
As ever, many of the factors behind this price spike have less to do with actual supply and demand and more to do with rumour and anxiety: one expert calculated that around $30 of the $100 price is “risk premium” reflecting worries over supply rather than real problems. But with oil industry capacity so tight, that twitchiness will not go away, and prices will continue to swing about like laundry in a gale.
Just because not enough oil is readily available in today’s market doesn’t mean not enough of it is under the ground. The gooey tar-sands of Canada contain almost as much oil as Saudi Arabia. The real problem is that during the cheap-energy era, oil firms cut investment in new capacity to a minimum: eventually, universities will churn out more geologists, and shipyards more offshore platforms, though it will take a long time to make up for two decades of under-investment.
Meanwhile, governments in many oil-rich countries are trying to grab more of the profits – thereby deterring or excluding private investment. The world’s oil supply would increase markedly if Exxon Mobil and Shell had freer access to Russia, Venezuela and Iran.
So will the oil price come down significantly any time soon? Investment bank forecasts for average barrel prices in 2008 range from $80 to $95, and many analysts believe the only real threat to high price levels is global recession. Meanwhile, green investors were certainly toasting the $100 a barrel achievement as clean biofuel, solar and wind power begin to look viable as fossil fuels become more expensive.
Of more immediate significance, however was E.ON’s announcement of the first new coal-fired power station in Britain for 30 years. Coal is cheaper. It’s also the dirtiest fuel on the market. Whatever politicians say about climate change, the likelihood is that we’ll stoke the furnaces with more coal. If that increases the risk that our planet cooks, it’s another price we’ll pay for $100 oil.