The Problems With
The Economist speaks out
Editor’s Note: The second quarter 2005
issue of District Energy magazine featured
an article by the Energy Information
Administration, an independent statistical
and analytical agency within the U.S.
Department of Energy. As part of District
Energy’s effort to introduce energy perspectives from other organizations, this
article is based on an April news release
issued by The Economist magazine.
Edited in London since 1843. The Economist
is a weekly international news and business publication with a worldwide circulation of more than 1 million.
As oil prices surge to above $50
[oil is now above $60] – up from
$10 a barrel in 1998 – a growing
chorus argues that we have entered an
age of sustained higher prices where
cheap oil is no longer a possibility. But,
according to a special survey and cover
story on oil in the April 28, 2005, edition
of The Economist magazine, whenever a
“new era” in oil is hailed, skepticism is
This in-depth report by energy and
environment correspondent Vijay V.
Vaitheeswaran was prepared after nearly
three months of interviews with key oilmen in Russia, China, Europe, Texas and
elsewhere. It is The Economist’s first survey of oil in 20 years. “It is popular to
talk about permanently higher prices,”
says Vaitheeswaran, “but this is wrong.
The future will see far greater volatility,
not ever-rising prices. Indeed, we may
even be in the midst of an oil bubble
akin to the NASDAQ bubble that could
burst quite suddenly.”
What has driven up the price of oil?
Vaitheeswaran takes a careful look at
both supply and demand and concludes
that neither provides a complete explanation. What has set the market alight is
the lack of spare production capacity.
The ‘buffer’ that has prevented the market from overheating during unexpected
supply interruptions has been in decline
for some years, because OPEC has not
been investing sufficiently to keep pace
with growing demand. As a result, global
spare capacity last year dropped to
around 1million barrels per day – close
to a 20-year low. Almost all of this was
in Saudi Arabia. In short, the market for
the world’s most essential commodity
now has no safety net to speak of.
In spite of the high prices at the
pump and the record profits that oil
majors like Exxon are making, it is misleading to think the industry is in good
shape. Conventional wisdom maintains
that today’s high oil prices mean a golden era for oil majors and OPEC, and a
possible economic shock for consumers.
But, the reality is, Big Oil is in trouble
and the industry faces wrenching change.
In fact, according to The Economist,
the western oil majors are in the worst
shape in decades--and now face challenges
that could wipe them out altogether.
They have their work cut out to cope
with the rise of resource nationalism,
which threatens to choke off access to
new oil reserves. This is essential to
replace their existing reserves, which are
rapidly declining. They also will have to
respond to efforts by governments to
deal with oil’s serious environmental
and geopolitical side effects. It is these
two challenges together that could wipe
Whatever problems the industry is
facing, it is not that the world is running
out of oil. It is inaccurate, says The
Economist, to think that there is a fixed
amount of oil in the ground and that
mankind has found it. Although the pessimists treat the level of recoverable oil
resources as fixed, the estimates on the
ultimate recoverable resource base have
consistently grown over the past few
decades. In addition, there are many
frontiers left that remain to be explored
with the aid of new technologies.
Although oil is not running out,
Vaitheeswaran argues that governments
have other compelling reasons to end
our addiction to oil: green concerns and
geopolitics. Growing concern about global
warming and worries about the Middle
East’s political stability are bringing the
American political right and left together
to argue for energy independence. And,
there are already signs that a clean-energy
revolution is getting under way. Whether
prodded by low-carbon regulations or
enticed by green subsidies, venture capitalists as well as large corporations are
pouring money into low-carbon energy
technologies, ranging from renewables
to carbon sequestration. Even nuclear
power is getting a second look because it
emits no greenhouse gases.
If the majors want to stay on top,
they too should take the threats to oil’s
supremacy seriously and start looking at
alternatives. An old industry saying goes,
“The Stone Age did not end for lack of
stone, and the oil age will end long before
the world runs out of oil.” Concludes the
survey, “Nowadays that sounds less like a
joke and more like a forecast.”
For further information or to view
the survey in full, please call Humphry
Rolleston, The Economist, (212) 541-0540.