IT should be a matter for quiet satisfaction here in the Kingdom that the world oil price on Wednesday hit a new record of $78.77 a barrel. Though it fell back later, it is now clear that the days of cheap oil are over. Indeed, some analysts are predicting the $100 barrel within the next five years.
Saudi Arabia’s far-reaching and substantial development plans have been based on much lower prices than at present, which means that even while undertaking such radical industrial and infrastructural enhancements, there will still be sufficient income to build up healthy reserves. A further cause for our satisfaction is that the high price of oil does not seem to be impacting on the global economies, which seem already to have factored in rising energy costs. Besides, though new demand for oil from the new economic giants, China and India has been pushing prices, so too have speculators, who have been buying futures in anticipation of little downside risk. Though this investment by intermediaries distorts the market, it is testimony to the far greater value placed on hydrocarbon supplies.
The new record oil price happened to coincide with two other events of probable long-term significance to the oil industry. Two Russian manned mini-submarines planted their country’s flag on the ocean bed 14,000 feet below the North Pole as part of their claim that it forms part of the Russian continental shelf. Given the disputed area is thought to be rich in oil and gas, the seeds of considerable international dispute were planted underneath that rustproof titanium flagpole. Canada, the United States and Denmark (via Greenland) could all present rival claims. At present the Arctic seabed is deemed to be international and is administered by the International Seabed Authority.
The second event also concerned Russia and the Arctic seabed. Gazprom announced to the dismay of international oil companies who had hoped to be chosen as project partners, that it was developing the world’s largest offshore gas field by itself. State-owned Gazprom can well afford the $20 billion investment in the giant Shtokman field. It will almost certainly also be able to buy in the necessary high technology.
Nevertheless, by freezing out foreign partners, the Russians are taking both a commercial and a wider economic risk. Russian readiness to use its oil and gas supplies as a political bludgeon has not only made investors jittery but also caused the Europeans to rethink their reliance on energy piped from Russia. Washington had been hoping to lift some of the Shtokman gas for its own markets. This has now been ruled out by Moscow.
The scramble for scarce oil boosts its political dimension. Washington, for instance, invaded Iraq in large part to secure oil supplies. China is forging strong links with black African producers. It is already clear that strategic tensions will further boost prices and a speculator feeding frenzy. The oil market seems to have changed forever.
