Global economic data show that much of what worries most Americans when it comes to oil and natural gas is not much of a problem.
Supplies are adequate, higher prices have slowed demand, the global economy is growing smartly, and there is plenty of oil in the ground waiting to be tapped, according to London-based Christof Ruehl, deputy chief economist for energy giant BP PLC.
Recent higher prices seem to be sustained in large measure not by too little supply and too much demand but by fear.
But don't relax, Ruehl told the Journal in an interview. There are political, social and environmental challenges that producing and consuming energy inevitably impose.
Developing countries with oil and gas reserves have to deal with the economic, political and social chaos— the resource curse, as it is known— that comes with oil wealth. Higher oil and gas prices have pushed electricity producers to shift to coal-fueled plants, raising the amount of global-warming gases in the atmosphere. Development of biofuels such as ethanol could create food shortages in some countries, and fuel crops need controversial genetic engineering to improve efficiency.
Ruehl was in Albuquerque recently to present BP's annual global energy statistical review to an invited group of New Mexico legislators, policy analysts and business people. BP has published its review for the past 55 years. A copy can be downloaded from
www.bp.com.
Ruehl and his colleagues assemble vast amounts of data, everything from pipeline capacity in Azerbaijan to temperatures in Australia. Then they see what story the numbers tell.
The 2005 story begins with global economic growth. The world's economy grew at 4 percent in 2004 (the fastest in 25 years) and 3.6 percent in 2005. "This translated into an enormous demand for energy," Ruehl said. That's a good thing. Economic growth is impossible without energy consumption, he said. Much of the growth was in the developing world, especially India and China.
So much demand pushed prices higher, but at the same time there were no meaningful energy shortages. The extra supply the world demanded "was delivered at the expense of spare capacity in the system," Ruehl said. Normally, the world has 3 million barrels of crude a day available as excess capacity. Today, spare capacity is about half that.
"It's a loss of flexibility, and the market participants know that," Ruehl said. On top of the loss of flexibility came other disruptions: the Iraq war, political unrest in Venezuela and Nigeria. Higher prices are the result.
Those higher prices did what they were supposed to do, Ruehl said. They kept energy flowing, even when hurricanes knocked out refineries in Louisiana, even when the United Kingdom lost natural gas capacity to accidents, even when pipelines were sabotaged in Nigeria.
More important, higher prices didn't choke off global economic growth, according to the data.
For one thing, energy just isn't as important a component of production. While world gross domestic product (the value of all goods and services produced) has doubled since 1980, world oil consumption has increased by only a third.
For another, Ruehl said, higher energy prices have arrived at a time when other prices are lower, especially wages and interest rates.
Higher prices are also forcing consumption adjustments. Electricity producers are moving away from oil and natural gas in China, for example, in favor of less expensive coal. The Chinese are also investing a lot of money in finding ways to make coal burn cleaner and more efficiently, Ruehl said.
The growth in oil consumption globally was 1.3 percent in 2005, down from a growth rate of 2 percent in 2004 and below the 10-year trend.
BP expects some price relief in three or four years once investment in refining capacity and new resources pays off.
There also appears to be plenty of oil in the ground, BP economists found. "Every year, what is produced is replaced," Ruehl said. BP uses a very conservative definition of proven reserves; the company doesn't count things like oil sands in Canada, undeveloped areas like eastern Siberia or even some untapped reserves in the Middle East.
Even at that, proven reserves will take the world beyond 40 more years of consumption for oil and 60 more years for natural gas, Ruehl said. That doesn't count a lot of oil and natural gas likely to be underground. "We don't see resource constraints," he said.
Inside Oil: A BP Economist Says Supply Is Adequate and the Problem Is Fear
Reply With Quote
Bookmarks