The world can very easily live with the $100 barrel of oil. Commentators currently wringing their hands and warning that the price of oil is very close to a historic high are misinformed. The 1973-74 oil price hike brought to an end two decades of persistently low returns for producers. The barrel price rose by 274 percent to $13 and triggered a worldwide economic slowdown. Thirty-four years on, oil is still cheaper in relative terms.
The strengthening of other world currencies, particularly the euro against the dollar is also depressing the oil price. Ironically, it is not that Europe is doing outstandingly better in economic terms than the United States, but that, rather in its bid to stave off the feared recession, the US Federal Reserve embarked upon a rate-cut campaign that makes alternative currencies a more attractive investment. Given the close inter-connections of all economies, no country, not even the booming Chinese and Indian economies, is going to fully escape the effects of a US downturn, if it happens. However, China and India at least have their huge domestic economies to turn to if export demand slackens dramatically. Production capacity built for world markets can arguably be retargeted to satisfy voracious local consumer demand.
And anyway, why should oil be cheap? It is a precious commodity and this ought to be reflected in its price. In addition, for the oil business the high price comes at a propitious time. In much of the world, the days of Big Oil — the easily found and cheaply exploited fields — are over. Deep-water offshore oil fields require many hundreds of millions, sometimes billions of dollars of investment to locate, develop and bring on stream. The costs are staggering. For instance, an exploration and production rig in the North Sea costs some $600,000 a day. When oil was cheap, difficult targets were avoided. The temptation was to manage oil and gas reservoirs to maximize primary or at best secondary production and avoid the challenges of tapping the more difficult parts of the field.
Oil companies are now investing heavily in new technology, which will lead to less oil being left in the ground and wasted. Monobore technology, for instance, means that satellite fields, which would have been uneconomic to exploit by drilling a new well over them, will now be reached from an existing rig and the production tied back into the collection system already in place.
For oil producers like Saudi Arabia, a realistic price for oil means far more than healthy budget surpluses. It also gives us the opportunity to invest in state-of-the-art technology and move further downstream in oil and gas products and byproducts, so continuing the essential diversification of the Kingdom’s economic base. And even if America does pull the world into recession, the oil price will not tumble. Only part of the high demand from India and China is fed by exports. Their economic reawakening is irreversible and so too is their demand for oil.
