“Demand security” is vital to “supply security.” Until this riddle is resolved, to the satisfaction of both, the suppliers as well as the consumers’, the required investment in infrastructure would not be forthcoming, energy producers have been arguing for some time now.
And for resources to pace with the leaping global energy requirements, huge investments are required. Without massive long-term investments in the sector, supply cannot keep up with demand. Goldman Sachs analyst Jeffrey Currie estimates it would take $3.5 trillion, indeed trillion, dollars over the next decade to keep up with rising demand. A major challenge indeed! However, as it stands today, actual investments are going to be a fraction of this number. Spooked by the experience of the 80s, when oil prices collapsed as incremental supplies flooded the market, oil companies, often termed as oil majors, have been cautious in reinvesting in the infrastructure. And this could easily spell disaster, for the entire world.
On the other hand investments by the national oil companies, with the exception of a few, have been lagging behind too. Saudi Arabia is but an exception. The Kingdom brought its Haradh facility online earlier this year in March. This gave a boost to Saudi output, with its capacity touching 11.3 million bpd. The Kingdom has embarked on an ambitious program to boost its capacity to 12.5 million bpd by 2009.
On the other hand, other players have not been pacing with the rising demand. The Russian production, for instance grew by somewhere between 5-10 percent per annum in the 90s. Today the Russian growth rate is merely 2-3 percent. Iraq is already down and the Venezuelan production has dropped by half since 2003.
Hence Claude Mandil of the IEA was very much on mark when he said that oil producers’ would struggle to boost capacity because of shortages of rigs and rising cost of building facilities. “I am afraid that in the next two to three years, capacity will only increase at the same pace as demand, with no increase in spare capacity,” Mandil said in Amman last week during a meeting of Arab oil producers.
And with little investment in the energy infrastructure, global consumption has been increasing for various reasons. Some analysts now say it is the SUVs that is responsible, to a major extent, for the current lack of balance in the market. Despite all talks about growing consumption in China and India, the fact stays that the US is the major contributor to this anomaly. India today burns merely 2.5 million bpd. The US consumes almost 10 times that amount. The single biggest shift in global demand over the past decade thus has not been the rise of China and India, but the rise of SUVs, in the US, many now argue, and without a reason.
Since the mid-1970s the demand for petroleum in Western Europe and Japan has been flat. The total oil consumption in Western Europe amounted to 14.7 million bpd in 1979, as against 14 million bpd in 2004. This is despite the fact that national income in Western Europe during the period increased by three and a half time, from $3.4 trillion to about $12 trillion. The same also applies to Japan.
In contrast, the US consumption over the last decade has doubled. The increase in SUV culture and an artificially low gas price in order to sustain that culture, has caused the demand in the US to soar. In Europe gas prices today are close to $7 a gallon while in the US it is below $3. The US has been the major spoiler, many thus argue today.
But defining demand security is not an easy to accomplish. Demand for oil is a complex issue and is not controlled by the governments in the consuming states alone argues Dr. Fadel Chalabi of the London based Center for Global Energy Studies. Besides the taxation policies, demand growth depends on economic growth especially in sectors that are energy dependent.
Demand security is a complex issue. And the lack of it generates uncertainty, which in turn hampers investments, so essentially required in the sector and that also in trillions of dollars. Such is the uncertainty that Minister of Petroleum and Mineral Resources Ali Al-Naimi urged the oil producers to study future demand forecasts before boosting output capacity beyond what’s already planned. “Global growth may not continue at this level for many years,” he forcefully argued at the OAPEC conference in Amman, Jordan.
A vicious cycle indeed!
But for the very sustainability of this fossil driven civilization this cycle needs to be broken. Energy fraternity has a major task in hand!
