Oil markets behaved “erratically” in 2005. With New Year unveiling itself with full pomp & show, the million, rather billion, dollar question haunting the energy fraternity is how the markets would perform in 2006. Questions are again being raised about the imminent end of this hydrocarbon era. In its last issue of 2005, Sunday Times columnist David Smith reiterated that the energy question may spell end of the good life for the West. Comparing the current complacency in the world about the emerging energy scenario, the columnist argued, “we may be nearing a Marble Cliffs moment of our own, sleep-walking into catastrophe by refusing to read the signs of impending danger, in terms of energy outlook.

Although his reasoning for the prediction is somewhat different from what Matthew Simmons has been arguing — rather crudely — all the past year. The debate thus continues — into the New Year as well — albeit differently.

Predicting on a slippery turf, such as oil, could easily be hazardous from a professional point of view, everyone concedes. Hence pundits always talk with an “if and but.” It could be no different this time too. However, the immediate history puts some rationale before answering the question about the behavior of oil markets in the New Year. The Organization of Petroleum Exporting Countries crude basket of averaged $50 a barrel in 2005, bringing the members of the oil cartel more than $500 billion in revenues. By comparison, the average price stood at $36 a barrel in 2004, and $28 in 2003.

The ongoing debate in the energy fraternity, however, needs to focus on two different parameters. One is the short-term situation and the other the long-term scenario. At times one does feel that both the scenarios start to get blurred — generating more confusion rather than providing a solution to the problem. No on at this moment denies there is a problem and that the world needs to handle them properly and present a united front — to handle this situation which could easily be unbecoming of both — the producers and the consumers.

In the immediate term, the markets are balanced to a great extent. This has prompted not only the OPEC to withdraw the 2 billion barrels of extra, though heavy, crude from the table that was offered in the wake of the Aug. 30 spike, but even the IEA has acted almost the same way. The Paris based OECD energy watch dog announced formally on the post-Christmas day that it was finishing the allowance provided to the OECD member states to withdraw from their strategic reserves. The step underlines that the oil markets are balanced, to a very great extent at this moment.

OPEC’s demand forecast has already been lowered. OPEC says the call on it s crude would drop to about 27.8 million barrels a day in the second quarter of 2006 — traditionally a sluggish period as far as crude consumption was concerned. The OPEC current output ceiling is 28 million bpd. In view of this emerging scenario, calls are already out to cut OPEC output. The new Iranian oil minister believes that the oil cartel should reduce its output ceiling by 1million barrels a day as “supply was now outstripping demand”. Eyes are thus focused on its next meeting in Vienna.

OPEC has already started to act. Its president was in Beijing late last month seeking information about demand and inventories of the country — a key requirement to plan. From Beijing the delegation flew over to Moscow — now second only to Saudi Arabia as far as production is concerned. In fact, Moscow briefly took over Riyadh as the world’s top crude producer. OPEC now views Russia “not as a competitor,” rather “hopes for increased coordination to maintain stability in the crude markets.” The cartel definitely wants to work closely with Russia, so as to ensure that the market forces do not work in a way detrimental to the current balance and hence the market prices.

However, the answer to the longer term could not be answered without the help from the consumers too. They also need to balance consumption. “The current model (of energy consumption) is suicidal,” Venezuelan Energy Minister Rafael Ramirez recently told journalists. “The United States, for example, will use up its oil reserves in 10 years, and after that it will go after its rivers, lakes and forests.”

The United States devours one out of four of the 84 million barrels of oil consumed daily around the world, and one out of two liters of gasoline.

But the developing economies need more energy. In India, less than 200,000 new cars were sold annually two decades ago, compared to 802,000 in 2004. “Since oil began to be drilled in 1859, the world has consumed 900 billion barrels - nearly half of the planet’s reserves (according to an oil industry expert quoted by the Wall Street Journal), which means we’ll have oil for another 50 years at the most,” said Francisco Mieres, a professor of postgraduate studies on the oil economy at Venezuela’s Central University. That long-term outlook will also be affected by more immediate political factors. The world will have to present a united front in order to handle this long-term issue!