Fereidun Fesharaki: 'NEW PARADIGM' TO KEEP OIL PRICES HIGH
Date: 01-26-2001
Fereidun Fesharaki, senior fellow in energy and economic development, East-West Center, and speaker at the
East-West Center's Asia Pacific Executive Forum on "Doing Business in a Changing Asia: A Strategic Vision" held Jan. 16-19. Topic: "Is Energy the Region's Achilles Heel?"
'NEW PARADIGM' TO KEEP OIL PRICES HIGH
The current cycle of high oil prices reflects a "new paradigm" at work that is likely to keep oil costs higher for years.
In the past, higher prices led to higher production and investment, which in turn dropped when prices did. But this pattern is changing. Increased prices and demand are no longer being followed by more investment and production. The supply is simply not there.
The shift comes amid a boom in U.S. and Asian demand for oil that has wiped out the world's spare capacity. "Just to keep up with current growth, a new Kuwait needs to be discovered every three years." Yet there haven't been any major oil discoveries in decades. Most of today's production comes from the cheaper oil finds of the 1950s and 60s.
This year growth demand will total approximately 1.1 million barrels a day: 80 percent from Asia and the rest from the United States, which has seen a steady decrease in its own oil production. While production in non-OPEC countries grew by one million barrels a day, OPEC nations added more than 2.5 million barrels per day to respond to higher prices and higher demand. Next year demand will grow by 1.5 million barrels a day, with non-OPEC countries stepping up production by only 700-800,000 barrels per day and OPEC seeing no room for growth. Reserves are running out. Only Saudi Arabia maintains a sizable reserve, and that will be saved for strategic purposes.
This is the long-term picture for some years. In the shorter term, because of seasonal variations, demand for oil will come down in the second quarter of 2001 with a probable decline in prices for a few months before they rise again later in the year. To avoid that, OPEC decided on January 17, 2001, to cut production by 1.5 million barrels per day ahead of the second-quarter decline in demand. This immediately shored up prices to more than $30 per barrel again.
Meanwhile, oil companies aren't investing in new production. Although profits are bigger than ever, "stockholders are not keen on the old smokestack industries or taking on environmentalists," and the last thing on their minds is exploring for new oil discoveries in risky places. They prefer to spend their money on easier ventures such as buyouts of others, buybacks of company shares, or higher dividends.
Other factors will complicate oil prices even more as the major players change. By 2005, China will overtake Japan in oil consumption and India will overtake Korea. "India and China can play the game more independently than Japan and South Korea with less consideration as to what the U.S. foreign policy makers think."
This new paradigm taking shape will keep prices at least at $25 to $27 a barrel for the next three to four years. That's $5 to $10 higher than the world has come to expect in recent times. These higher prices, however, should be only "minor irritants" to the U.S. economy -- and slower U.S. growth might ease growth in demand.
Contrary to the U.S. mainland, Hawaii has been paying higher prices for years -- not as much as Silicon Valley, but more than other U.S. mainland areas. While conspiracy theories claim prices have been manipulated by the oil companies, economic factors more clearly paint the price picture. Hawaii produces none of its own oil like other states; land and property remains exorbitantly high; and already costly transportation has increased 300 percent in the last year as Greek tanker owners have been replaced by the more environmentally sound double-hulled ships. Profits are marginal in a small market that hasn't grown, although currently profits are higher than they have been for some time.
This new paradigm taking hold will mean the world can expect to pay higher oil prices for several years, although seasonal price fluctuations will continue. It's a simple matter of supply and demand.
Fereidun Fesharaki can be reached at 808-944-7527 or fffacts@attglobal.net