Biggest oil fields have peaked: Prices must rise

Supply, though, is not keeping pace with demand for oil, and its derivative products, by a world population, now reaching 7 billion. On the supply side, an assessment reported in Petroleum News in 2009 of 800 oil fields in the world, covering three quarters of global reserves, found that most of the biggest fields had already peaked and that the rate of decline in oil production was accelerating. On top of this, experts identified a chronic under-investment by oil-producing countries, a feature that was predicted as bound to result in an “oil crunch” as soon as pre-2008 global growth rates were resumed. End of story: which way oil prices? High and up.

The flaw in this story is that it views the world as a market, oil as a commodity, and the future as predictable. A sounder piece of advice comes down from Pliny the Elder who stated that the only certainty is that nothing is certain.

Which way the oil price moves is intimately tied into the dialectical process we call globalisation. It features widening prosperity and deeper imbalances in economic development, a steep hierarchy in the distribution of wealth and power alongside a diffusion of the global power structure, and an unparalleled networking of humanity through television, the mobile phone and the internet, thereby bringing people to live check by jowl in an unprecedented intimacy, despite the inherited distances between religion, languages or cultures. Globalisation is anything but a one way street to prosperity and freedoms for all.

Two recent events should remind us of this. One is related to the geological fact that the market power of the very few oil-producing countries that hold substantial reserves of oil – mostly in the Middle East, North Africa and the Gulf, is already high at about 40 per cent share of the oil market, and may grow in the future, if the market trends cited above continue.
The other is the far-reaching suggestion by President Mevdevev’s human rights council that the Soviet Union be declared a criminal state, and that all archives on its activities be opened to scholars. “Complete acknowledgement of the Russian catastrophe of the 20th century”, the proposal suggests, is vital to establishing public trust in the Russian state.

For alongside rational calculations of supply and demand, the human saga is driven by our collective inventiveness, by our passions and emotions. And emotions matter notably in regard to oil, where the world’s growing dependence on one region inspires a “fear factor” which contribute as much as $15-20 per barrel in price spikes.

Over-reliance of the world on the region prompts fears of supply disruptions related to concerns about the prospect of a nuclear-armed Iran, the deep social changes afoot in the Arab world, or the precarious hold on power of some rulers there—as evidenced in the recent fall of Presidents Ben Ali of Tunisia and Mubarak of Egypt, the recent events in Libya, or the disturbances in Syria and Bahrain. They are compounded by fears in the region and elsewhere that, just as President Bush’s determination to unseat Saddam Hussein in early 2003 was interpreted as a grab for oil reserves, the same motive is at play in Franco-British policy, with US backing, on enforcing UN Resolution 1973 over Libya’s airspace.

The motive, needless to say, lies in the European Union’s espousal of the cause of human rights, in counterpart to the disaster of the two world wars, and as the battleaxe which felled the communist party-states of central-eastern Europe in the year 1989, leading to German unity and the collapse of Soviet power. In the view of the governments of France and Great Britain, the Union would lose all credibility in the eyes of its own citizens if Colonel Gaddhafi’s tanks were allowed to crush his opponents in Benghazi, in the manner that the Red Army tanks crushed the student movement in Prague in August 1968. The “Arab spring”, to use the current idiom, is a European interest that opens the way to a wider peace arrangement across the whole region, to a more successful absorption of a European Islam, and a careful reduction of the American presence there-a development arguably in the US interest.

The Russian Presidency’s plan to condemn the Soviet Union is no less momentous. Since the diplomatic farce of Russia’s August 2008 invasion of Georgia impaired the vision of Russia reviving solely on the foreign exchange gained as a petro-state, Moscow has taken discreet steps to move Russia closer to the EU, while also continuing President Yeltsin’s policy to co-operate with China over trade, technology transfer or the settlement of frontier disputes. In particular, Russia joins with China in opposing the western powers interpretation of the UN 2005 certified “right (for the “international community”) to intervene” in the internal affairs of other countries in the name of humanitarianism. But that is about the sum of Russian-Chinese relations.

If truth be told, Russia fears China. In 1990, the Russian and Chinese economies were of the same size, whereas by 2011, China’s is five times larger, and likely to be 10 times larger by the end of the coming decade. Russia’s apprehension in being dragged into vassal status as a commodity provider to China’s manufacturing platform is evidenced in its pattern of trade: despite China’s thirst for access to Siberian oil and gas, only 10% of Russia’s total exports go to China, compared to 80% to Europe. Over 50% of Russia’s official foreign exchange reserves are denominated in Euros. This commercial opening to the EU has been complemented over the past two years by a strengthening of ties with Germany, Italy and France, and especially by the major improvement in Polish-Russian relations following on Moscow’s public acknowledgement of Stalin’s crime, ordering in early 1940 his police chief, Beria, to murder 22,000 Polish officers and patriots in the Katyn forest massacre, west of Smolensk.

If the Russian Presidency succeeds in officially declaring the Soviet state to be criminal, the impact on world affairs is difficult to over-estimate. The Soviet Union’s existence was the decisive event of the past century, and its official criminalisation is the vital step for Russia to anchor on the European Union as its major ally. Simultaneously, such a step challenges the roots of the China party-state’s legitimacy, the internal dynamics of which has prompted other powers to sketch out countervailing alliances in containment of what Singapore’s minister mentor, Lee Kuan Yew, has called “the largest dragon of them all”.

A widely-held prejudice in Europe and the U.S. is that democratisation involves convergence on a liberal democratic model of free elections, the separation of powers, the rule of law and free speech. But democratisation is also compatible with theocracy, as in Iran; with the army as guarantor of a secular order more open to religious influence, as evidenced in recent developments in Turkey, and perhaps in Egypt; or eventually with the Chinese party-state. The West flatters itself if its representatives mistake the form of westernisation for the substance of an updating of older traditions and passions.
What does this say about the direction of oil prices? Because emotions drive people, and people drive markets, oil prices may rise and they may fall. Pliny the Elder has the last word.

Written by Prof. Jonathan Story, Emeritus Professor of International Political Economy, INSEAD Business School