Sunday Times (London)
June 24, 2012
by Irwin Stelzer
Slow growth in America and China, and recession in Europe are reducing demand for oil. Inventories in the US are at a 22-year high.
The Federal Reserve Board's quantitative easings that pumped paper money into the economy and drove up the nominal price of oil have come to an end. And the 12 Opec oil cartel members, who between them supply 40% of the world's oil, are producing 1.6m barrels in excess of the agreed daily quota of 30m barrels. As a result, US benchmark crude oil prices are now closer to $80 a barrel than to the $110 they reached only four months ago.
Opec's hawks — Venezuela, Iran and Nigeria among them — want Saudi Arabia to rein in output. They need much more than $80 to cover their budgets, while non-member, fellow-traveller Russia needs closer to $90 to avoid a problem for its rouble. The Saudis feel they can finance their welfare state, their princes' lifestyles and their clerics' call for funds to spread their misogynistic anti-Semitic version of Islam around the world with $80 oil. So that's the new floor.
The Saudis have several reasons for accepting lower prices, at least for now. For one thing, they do not want a severe global recession, lest oil demand collapse and the value of their enormous investments in Western assets be impaired. For another, they are preparing to make up for any output loss should the European embargo on Iranian oil take effect on July 1, as scheduled. That ban would remove about 500,000-700,000 barrels from world markets, and the Saudis are determined to prevent a price spike that might weaken the resolve of the consuming countries to continue the ban on oil from their regional rival.
All of this makes for exciting geopolitical manoeuvring, and provides oil traders with food for thought. But it is far less important than fundamental changes that are going on in American energy markets. Thanks to a new tech- nology known as fracking, production of oil and gas from shale is increasing despite the Obama administration's reluctance to grant permits for drilling on federal lands and offshore.
America, which in 2008 imported almost 60% of the oil needed to run its cars, trucks and factories, now imports only 45% of its requirements. And that is likely to decline when the vast quantities of oil under the surface of American lands and coastal waters, including two trillion barrels trapped in shale and sand — 100 times our currently reported reserves — are finally tapped.
That is only one of the threats to Opec's continued dominance of oil markets. A second is Canada, with its vast reserves of oil shale, waiting construction of pipeline connections to the US — so far refused by President Barack Obama.
The third is natural gas, now available in such huge quantities as a result of new drilling technologies that prices are depressed, as seen by producers, or attractive as seen by consumers and by developers of gas-powered vehicles.
Finally, there is electricity, available more cheaply from generators fuelled by cheap, abundant natural gas and, possibly, by a renascent nuclear power industry that some utilities are betting their shareholders' money has overcome its history of cost over-runs and operating problems.
At the moment, the use of natural gas to power vehicles in America is confined largely to buses: only Honda is offering a natural gas vehicle for ordinary consumers. These vehicles do have limitations: the tank for natural gas consumes almost all the space in the boot of an ordinary passenger car, and infrastructure for refills has yet to be developed. But wider use is expected to result from lower natural gas prices.
The electric car and its hybrid variants have become the véhicule du jour of the wealthy, trendy green Hollywood set, but nobody outside of the White House believes Obama's prediction that one million such vehicles will be on the road by 2015.
So far, growth in the use of these so-called plug-in electric vehicles (PEVs) depends heavily on several subsidies from the federal government. Buyers get a tax credit of $7,500, and makers of batteries for PEVs receive subsidies from a $2 billion fund used by the administration to pick winners in the race to develop batteries that can reduce "range anxiety" by increasing the range of PEVs from their current at-best 80 miles, clocked by the new Ford Focus Electric. Hybrid electric/petrol vehicles do better.
One beneficiary of taxpayer largesse, A123 Systems, the poster boy for Obama's drive to replace petrol with batteries, recently laid off workers after one of its products proved to be a dud, and is now seeking private financing to supplement the $249m promised by the government so that it can continue down a new, allegedly more promising path. The company's first-quarter loss of $125m and 40% drop in revenues were due to soft demand for PEVs.
If A123 does go under, its fall will add to the president's embarrassment at the failure of his other chosen "winner", Solyndra, a bankrupt solar panel manufacturer that cost taxpayers half-a-billion dollars. Politicians make poor venture capitalists; Mitt Romney's supporters argue the reverse is not true.
Not all the news is bad for the PEV industry: Federal Express is slowly converting parts of its truck fleet from petrol to battery-driven, and the military is attempting to do the same to reduce problems of supplying petrol to its far-flung forces. But the petrol-driven car will be with us for a long while, eliminating any pressure on the Saudis to open the valves so as to lower prices to the $50-$70 range on which they thrived a mere three years ago.
If America's environmentalists lose their fight to prevent the spread of new drilling technologies, to curtail development of oil-rich areas in the United States, and to prevent the construction of pipelines to Canada, and if some of the new alternatives to petrol develop, Opec's power over prices might be weakened. Not eliminated, just weakened. That's progress of sorts.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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