One way or another, oil will cost us dearly

PUBLISHED : Thursday, 01 May, 2008, 12:00am
UPDATED : Thursday, 01 May, 2008, 12:00am

Last week Hamish McRae, one of the world's best economic journalists, declared that 'hardly anyone a year ago successfully predicted the rise in the oil price to US$120 a barrel - in fact I have not found a single forecast of that'. In fact, I predicted oil at over US$100 a barrel in April 2006, and much higher than that in July last year.

I reckon this gives me the right to offer some further forecasts. So I predict that the price of oil will soon fall - a bit. So far, the economies of the 'Bric' nations (Brazil, Russia, India and China) are still growing strongly, but the old industrialised economies are definitely heading into a recession, and they still consume most of the oil.

This recession has not been caused by the high oil price; the subprime mortgage scam is to blame for that. But the recession is likely to drive the demand for oil down far enough to bring the price back down to US$100 before long. Then, in 2009 and 2010, as the 'old rich' economies recover, it will probably go back to US$130-US$150.

The price will rise because demand will recover much faster than supply can grow, if indeed it grows at all. The world's largest oil producer, Saudi Arabia, admits that there is now not enough spare capacity among the Opec producers to make any difference. Production in Russia, the biggest non-Opec producer, will probably fall this year.

So, once the recession ends, the price of oil will probably stay at about US$100 for most of the time in 2010-2015. But it won't hit US$200, because there will be a steep rise in the supply of non-conventional oil from tar sands, oil shales and other sources of 'heavy oil'.

Even if the moment of 'peak oil' is upon us, that would not mean the end of oil; it just means the end of sweet, light crude. The Alberta tar sands are profitable if the price of oil stays over US$40 a barrel; at US$60, the far larger Venezuelan tar sands are viable, as are the oil shales of the western US at US$80.

In a world with a stable climate, ample unconventional oil supplies would bring the oil price down below US$100 again, but that's not the way it's likely to play out. By 2015, global tolerance for any process that involves high emissions of greenhouse gases is likely to be very low. Indeed, throw in a few dozen more climate-related catastrophes like Hurricane Katrina or the killer heatwave in Europe in the summer of 2003, and what would popular support for burning fossil fuels be in 2015? Not very high, one suspects.

Demand in fast-growing developing countries will probably keep conventional oil near the US$100 level well into the 2020s, but political pressure to end extra-high-emission unconventional oil production may become irresistible.

In the still longer run - the 2030s and beyond - the demand for oil will probably fall even further and, with it, the price. How do we know that? If it hasn't fallen due to a deliberate switch away from fossil fuels, then global warming will gain such momentum that entire countries are falling into chaos instead.

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.