While the OPEC oil ministers’ were meeting in Isfahan on March 16, the US Senate was involved in passing a bill to open Alaska’s National Wildlife Refuge to oil and gas drilling, handing a bitter defeat to environmentalists, who have been opposing this bill, tooth and nail for long.
In the meantime, the OECD energy watchdog, the International Energy Agency is reported to be proposing drastic cutbacks in car use (in the industrialized world) to halt continuing oil-supply problems. The Russian factor also seems to be weighing heavily on the nerves of the crude markets. According to industry sources, Russia reportedly again failed to achieve full oil reserves replacement last year, as its new finds represented only 72 percent of its output. Russia reportedly added 330 million tons (2.4 billion barrels) in new reserves against 2004 output of 458 million tons. The reserve replacement ran at 85 percent of output between 1999 and 2003.
Analysts say future growth in Russia depends on how the country taps new deposits outside its key producing region in West Siberia in places such as East Siberia, the Arctic shelf, Sakhalin Island, northern Timan Pechora region and the Caspian Sea. According to BP’s statistical review, Russia has the world’s seventh largest oil reserves of 69 billion barrels, but many analysts believe they may become much larger due to more exploration. Some analysts say with the addition of reserves in new provinces Russia could outpace Iran, which has the world’s second largest reserves of 131 billion barrels, and beat all but Saudi Arabia with its unmatched 263 billion.
Russian exploration should increase if parliament passes this year a new law on subsoil use, which would give firms that strike oil the right to develop the deposit, adding a major incentive to invest in exploration. Under the current law, the state can re-offer the deposit at a production rights auction even if the exploration license holder invested millions of dollars in the field.
Al this raises questions are we returning to the era of mid-70s, where there were talks of energy conservation and alternative sources of energy all around? That it did not contribute much to the global energy equation is another issue, yet one thing has definitely happened over the intervening years. The global market share of the OPEC 11 in the oil market has eroded from some 50 percent in the early 70s to below 35 percent in the current times. There was definite politics to it, analysts concede. The West didn’t want to be too dependent on oil from the Gulf. And since the economies of today are considerably less sensitive to the idiosyncrasies of the energy markets, despite all what is being said and reported, the effect of crude supplies at a considerably higher market prices is not having a real debilitating effect on global economy. Oil is no more the sole culprit!
The anxiety in the global crude markets however is real and this is despite the fact that no shortage of crude has been noticed or reported from anywhere. A perplexing situation indeed, yet it is understandable in some ways! The apparent explanation is that with galloping demand, there is not much spare capacity available to fall back, as has been the case in past. According to estimates 327 global oil and gas companies have allocated $176.8 billion, 5.7 percent more than the previous year, on development and exploration programs. American oil companies reportedly have increased their development budgets by 7.8 percent to $41 billion. As many as 249 global oil companies are expected to spend nearly $100 million each this year on their various projects, emphasizing global growth in drilling activities and understandably so.
In the absence of any major finds in areas other than the Gulf, global crude markets stay sensitive to any potential disruption. Despite no immediate shortage, there is a definite issue at hand. In the longer run additional capacity and newer finds would help sooth the volatile markets. The OPEC itself cannot do everything. The world needs to cooperate and not confront. That is not, however, the easiest thing to come by, one must concede.