Rapid advancement in technology during the twentieth century led to a drastic reduction in cost of transportation, fundamentally changing the way businesses plan their production lines. Today a transnational company?s decision to choose location for its manufacturing facility is likely to be influenced by the availability of cheap labour rather than proximity of market. The reason is simple: transport cost is no longer a crucial factor in corporate marketing strategy. Economists call it globalisation, that is, unhindered flow of humans and goods across borders. What propels and sustains globalisation is availability of cheaper oil that makes transportation affordable. But oil might not remain cheap for long given the alarming pace of depletion in world?s oil reserves. If that happens, our lifestyles might see a drastic scaling back. This is what Jeff Rubin stresses in Why Your World is about to Get a Whole Lot Smaller.
The author worked as chief economist with CIBC World Markets for 20 years. His main finding is that the basic laws of economics?that higher prices automatically lead to higher production, correcting the demand-supply imbalance in the market?do not apply to oil. The book provides many such insights. How would be our life without cheaper oil? To give us a peek into that, the author has portrayed the life in Serbia in mid-1990s when a series of conflicts led to break-up of Yugoslavia. Because of UN sanctions, petrol was available only in the black market. Many left their cars at home and used other means to get to the place they intended to go. Belgrade was quiet and the air was clear. The cafes and bars were full and sidewalks still bustled with people going about their business, but parked cars never moved.
Oil companies have to find new oil reserves to replace the existing production. But this is getting increasingly difficult as easy oil reserves are depleting fast. Producing oil from new reserves, which are mostly located in difficult areas such as deepwaters and tar sands, is going to be costly.
OPEC meets about one-third of the global oil demand. But key member countries including Saudi Arabia are struggling to increase production. Meanwhile, domestic energy consumption in these countries is rising fast because of new prosperity brought by high oil prices of recent years and also due to their government?s policy to keep oil prices artificially low. Besides, these countries are also setting up huge petrochemical manufacturing capacity to make the most of their oil resources. So it is clear exportable oil surplus will be increasingly diverted to meet domestic demand of these oil exporting countries on whom oil-importing countries like India are banking for supply of oil.
India?s dependence on imported crude oil is growing by the year as the economy remains on a high growth trajectory. ONGC is India?s largest oil producer, getting 73% of its revenue from oil. However, most of its onshore fields have matured and production is declining. Globally, it is the same story with other oil companies. Investors make valuations of an oil company on the basis of its reserves rather than production. So oil companies never tell about their declining reserves. Instead, oil companies tend to put a brave face when faced with questions about the world?s depleting oil reserves. For example, Shell Group, the world?s third largest oil and gas exploration company, was found guilty of overstating its reserves to investors. The company had to face uproar from its shareholders when the matter came to light in 2004.
Scientists are trying to find alternatives to oil, without much success. For example, biofuels had initially raised hopes of reducing oil-importing countries? dependence on oil as a transportation fuel. However, undertaking large-scale bio-fuel production as an energy security goal could seriously compromise food security while production and transportation of bio-fuels to the pumps might require more energy than what would be finally derived from it.
Oil-importing countries are betting big on raising energy efficiency of vehicles and equipment in a bid to save energy and cut crude import bills. They have significantly reduced per unit energy intensity of GDP. But there is no reduction in overall energy consumption. Rather, energy demand in these countries has risen as motorists drive more, offsetting gains of energy efficiency. So it is clear that efforts to improve energy efficiency might not help countries in reducing oil consumption. As quantum of global exportable crude oil declines, prices will go up. This would help boost revenues to producers but might hit countries like India which heavily depend on imports to meet their crude oil requirement.
International crude oil prices were quite high between 2005 and 2008. But Indian policy makers failed to evolve a consensus over deregulating prices of petroleum and diesel. Domestic motorists did not cut their fuel consumption in response to high oil prices. The result was that the government?s fuel subsidy bill ballooned, putting strain on its fiscal health.
Producing oil from offshore blocks is not only costly but also poses serious risks to the environment as the oil spill in the Gulf of Mexico shows. Following the incident, insurance companies have already raised premium for providing coverage to offshore oil fields. Now there is apprehension that government might become cautious about offshore oil exploration and tighten safety regulations. That means cost of oil production from such fields will rise, putting upward pressure on international crude oil prices.
While the author?s arguments are compelling, some might find his prediction alarming given that the world is pinning hopes on renewable energy sources like wind and solar to meet future energy requirement. However, the bottomline is that a credible alternative to oil as a transportation fuel is still nowhere in sight.
The book provides us an idea about how oil prices could behave in the future and is a must read for those Indian policy makers who do not seem to believe that oil subsidy is not sustainable in the long term.