Opinion: Crunch time for oil?

Oil pumps By Dr Robert Falkner, LSE Global Governance and Department of International Relations

26 January 2011

Is the world facing a looming oil crunch? Until recently, most energy experts would have considered this question alarmist. Today, a number of indicators point to growing instability in global oil markets.

When the oil price hit a record $147 per barrel in 2008, shockwaves were sent through the global economy. The economic recession brought prices down to $32 at the end of that year, but as the economic recovery gets under way prices are pushing up again, reaching $75 in September 2010. More and more analysts now argue that the era of cheap oil is over, and that greater price volatility will be with us for the foreseeable future. This could have severe consequences for Britain.

Two long-term developments are behind this worrying trend. For decades, oil demand has been rising steadily. Britain and other industrialised countries may have been able to halt the growth in oil consumption within their own shores, largely by greater energy efficiency and a shift away from energy-intensive manufacturing. But the forces of globalisation are changing the dynamics of future energy demand, which will be driven by the emerging economies. Countries such as China and India are experiencing unfettered growth of export-oriented industries and rapidly rising car ownership among the new middle classes. Their thirst for oil will more than compensate the weakening of demand in established industrialised countries.

The second development involves growing oil supply constraints. These have been less visible but could be of even greater importance. Just as global oil demand is returning to its long-term growth path, oil production is starting to come up against barriers that will prevent it from keeping up with this demand. Chronic under-investment in oil exploration and production is one factor. More worrying is the prognosis that the world may soon be passing peak oil, the point at which the global capacity to produce oil reaches its highest point and starts to level off or decline. With supply unable to serve growing demand, oil prices are bound to rise.

Peak oil theory dates back to the 1950s but has only recently gained traction in expert circles. Throughout the second half of the 20th century, oil companies sought to reassure the public that the world would not run out of oil any time soon. A series of major oilfield discoveries bolstered their argument that oil reserves were plentiful. In any case, technological innovation would allow us to find oil in ever more remote locations, or to replace it altogether with another energy source.

But the situation has changed dramatically in the past few years. New oil discoveries are failing to keep up with current consumption rates, and BP’s oil spill in the Gulf of Mexico has underscored the commercial and environmental risks involved in the scramble for ever more remote oil reserves.

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