During the week ending November 16, the price of crude oil in the international market shot past the $100 per barrel before settling in the high-90s for the third week running. The global market is abuzz with the inevitable question?would $100 be the new equilibrium price? Given the political instability in the Middle East, which has about 55.3% of the world?s proven reserves, there is little prospect of any short-term remission in price rise. But concerns over a new equilibrium price are less affected by short-term market speculation than other medium- and long-term variables.
One of the most important variables is the state of world oil reserves. Presently, the most popular prediction indicates that oil production would peak around 2030 at the present levels of production and consumption. This can, of course, change with discovery of fresh reserves, or with appreciation of capacity of existing reserves with technological improvements. During 2000-07, for instance, the oil reserves of Iran alone have increased by 52% (from about 90 to 136.6 billion barrels), while those of Canada have risen from 5 to 179 billion (counting shale oil). The total estimated increase in world reserves in 2006-07 alone has been around 24 billion barrels worldwide. New technologies for oil exploration (such as 4D seismic methodology, horizontal drilling and enhanced recovery methods) are proving crucial in locating reserves previously unknown or unexplored.
A second variable is the growing tendency to look beyond conventional oil as a primary energy resource. Natural gas has fast emerged as the most preferred alternative to conventional oil as much because of easy deliverability (using allied delivery infrastructure such as pipelines and tankers) as of considerable global reserves (6,183 trillion cubic feet worldwide as of January 2007). The US Energy Information Administration (EIA) projects natural gas consumption worldwide to increase over 50% from 100 trillion cubic feet in 2004 to over 150 trillion cubic feet by 2030?with the largest increase being in the industrial sector and energy generation. The incentive to switch to other sources of energy increases in line with oil prices. Energy pundits are already looking at a 2030 scenario where use of conventional oil resources are optimised in the transportation sector, while other non-renewable carbon fuels (such as coal and natural gas) and non-conventional and renewable energy resources are dedicated to the industrial sector and power generation.
One potentially beneficial impact of high crude oil prices is that the money made by Opec members could be reinvested in new exploration technologies which might reduce prices in the long-term. Although the principal beneficiaries of any such quest for new technology are likely to be American and European oil majors, two other potential players have emerged over the last two decades?India and China. India?s overweening dependence on imported oil has prompted the country to buy the most inferior quality of cheap crude from the international market and then work hard at refining it. As a result of this strategy, India now commands the most sophisticated refining technology in the world, thus making it possible for even the most inferior of crude reserves worth exploring.
China, however, is likely to emerge as a far more powerful player. With its total energy requirement projected to increase from 59.6 quadrillion British thermal units (btu) in 2004 to 160.9 quadrillion btu in 2030 (the figures for the US for the same period being 100.7 and 144), Chinese companies have begun to invest in oil in those countries where European and American oil majors are not present (such as Iran and Sudan). As China?s leverage grows, the world energy market is far less likely to revolve around Europe and North America. This is likely to take a toll on crude oil prices.
Apart from such considerations, the political volatility in the Middle East is encouraging speculation in both the commodities and futures market. There is a decent likelihood of the equilibrium price of crude oil hovering around $100 for some time to come.
?Kingshuk Chatterjee is a fellow at Maulana Azad Institute of Asian Studies, Kolkata. These are his personal views