Uncertainty has taken over the energy world. And it is detrimental to every one, be it consumer or producer. The consequences could be horrific.
A number of factors are in play. The volatility of oil market pricing is a major issue. After all most producers have a single product economy. With extreme swings in play, they are almost in dark while projecting their long-term incomes and expenses.
OPEC (Organization of the Petroleum Exporting Countries) oil producers could lose $4 trillion in revenue between now and 2030, if a UN conference in Copenhagen next month strikes a deal on global warming curbs, the International Energy Agency projected earlier.
“With current policies in place, OPEC revenue will be about $28 trillion (18.7 trillion euros) between 2008 and 2030 if there is no climate change deal,” IEA Chief Economist Fatih Birol said. “If there is a deal, OPEC revenues will be only 24 trillion dollars.”
The IEA scenario is based on an assumption that the concentration of greenhouse gases in the atmosphere would be limited to 450 parts per million, which scientists say would in turn limit a global temperature rise to 2.0 degrees. With limitations envisaged by the agency, demand would come to only 89 million barrels a day by 2030. However, with no change, worldwide demand for oil would come to 105.2 million barrels a day between now and 2030.
The danger from carbon emissions has sparked a worldwide search for renewable sources of energy, such as wind power, nuclear energy and solar energy. China, the United States, Spain and Germany have all launched ambitious projects to harness solar energy. The idea is also catching on elsewhere.
Other developments are causing additional uncertainty. Despite talks of peak oil, an over-supply scenario could also emerge. Iraq has recently signed a number of agreements with international companies, which, according to Iraqi Oil Minister Hussein Shahristani, could boost Iraq’s production from less than 2 million bpd today to nearly 10 million bpd within a decade. In the coming years, OPEC will have to accommodate this soaring output from Iraq in its calculations too.
At the same time, more intensive oil exploration deep beneath the seabed, together with new technologies for enhanced oil recovery (EOR), are also expected to give considerable boost to the world’s recoverable oil reserves.
In the immediate run too, uncertainties continue plaguing the global energy balance. The OPEC November Monthly Oil Report (MOR), while pointing to the scenario, says: “Although most of the signs are pointing toward higher oil demand, a potentially weak economic recovery along with higher oil prices are the two main factors that may dampen world oil demand in the coming year. Should prices increase and be sustained above the current level, oil demand growth will be pushed down by more than 1 percent in the (OECD) countries.” The cautiously optimistic projection of rebounding demand underscores the uncertainty lingering in the world energy market.
And then the report added: “Even if the expected economic recovery materializes, it remains to be seen whether demand would be able to return to pre-crisis levels. Energy policies and behavioral changes are bound to have some impact on consumption and this will gradually feed into overall demand patterns, especially in key sectors such as transportation.”
In the meantime, geo-politics too continue to haunt the energy markets. Even now, one cannot write off the possibility of a strike by Israel on Iran could result in the choking of the Straits of Hormuz, shooting the price overnight to the stratosphere.
And then there is also a growing skepticism of the data being put forward by none else than the IEA. The daily Guardian carried a report earlier the month quoting anonymous senior figures within the IEA accusing the agency of fudging the data at the behest of the Americans, academics in Uppsala University in Sweden also added their voice to the chorus, publishing a scathing assessment of the World Energy Outlook presented by the IEA.
Producers indeed have their concerns on the emerging scenario. Hasan Qabazard, the director of the Research Division at the OPEC Secretariat, was in Riyadh earlier this month and on a beautiful Sunday morning he made an enlightening presentation at the International Energy Forum Secretariat in Riyadh.
For the first since the 80s, oil demand has in fact gone down by 1.4 million bpd on an annual basis. Similarly, the current global inventory levels were also worrisome — close to the 1998 levels — when oil markets collapsed, remarked the OPEC research director. Floating storage and the increasing volumes in strategic petroleum reserves of various countries including China were also contributing to the uncertainty in the markets.
Qabazard was definitely critical of the speculative trends in the markets too. Sometimes, the paper oil circulating in the market was 20 times the total amount of physical oil being traded on a global level, he pointed out. In mid-2008, when market prices hit a record high, some $300 billion of speculative money was pumped into the sector, as compared to the $20 billion-$30 billion in 2003-04.
Qabazard was specific: There are confusing signals to the producers on market demand. And in the current scenario — the huge investments required in the energy infrastructure may not be coming, he warned.
And in the current scenario who could dare predict where prices will be a decade or two from now? And thus how could the producers plan their economies, if they are not sure of the returns on their major export? And consequently who is going to invest in the industry in the wake of all these uncertainties and confusing signals from all around.
The overall picture is not only confusing — it is worrisome. Steps need to be taken now to rectify the scenario. Are the energy diplomats’ up to their task — a big question indeed?
