Storm, The

Storm, The by Vincent Cable

Book: Storm, The by Vincent Cable Read Free Book Online
Authors: Vincent Cable
Tags: Finance
its last bastion.
    There has been, overall, a remarkable increase in frugality in the world’s use of oil over the last three decades. The gas-guzzling
     USA has halved its oil intensity (measured as tons of oil in relation to real GDP). So have Europe and Japan, from a lower
     starting point to an even lower level. China has made even more spectacular advances, mainly because of the movement away
     from the extraordinary inefficiency of the Stalinist heavy industry favoured in the 1950s and 1960s.
    In parallel, there was a rapid growth in non-OPEC production. Higher prices made oil exploitation and production highly profitable
     for the first time in many years. The main stimulus to production was in the USA, especially in Alaska and, later, the Gulf
     of Mexico, and in Mexico itself and the North Sea, but oil companies went looking for oil and found it in commercial quantities
     in Malaysia, Gabon, Angola, Egypt, Oman and China. OPEC was as a consequence forced to make the difficult choice between holding
     back production to support the price and maximizing revenue for development, leading to growing tension between the richer,
     low-population members, which could exercise restraint, and the poorer, higher-population countries. As oil prices plummeted
     in the mid-1980s, the oil producers desperately cut back their production, to 17 million barrels / day in 1985 – barely half
     of production capacity – in order to support the price. Budget pressures then forced them to increase production, driving
     prices down further. These were OPEC’s darkest hours. The decision of Saddam Hussein to invade Kuwait in 1990 had much to
     do with a growing sense of financial desperation and tension between OPEC countries.
    The upshot is that OPEC, despite having the lion’s share of world reserves and almost all the world’s low-cost oil, has not
     increased production, of around 32 million barrels /day, in an expanding world market, since a third of a century ago, before
     the first oil shock. The entire increment in production now comes from outside the OPEC countries. Back in 1973, OPEC produced
     over half of all the world’s crude oil, but now it produces barely one third (32 million barrels /day out of 84 million barrels
     /day, in 2007).
    Oil optimists cite this experience of diversifying production as proof of the ability of the oil industry to respond positively
     to ‘scarcity’ and higher prices. They expect to see the trick repeated again in the future, with non-conventional oils in
     Canada, through deep-sea exploration, and in new zones such as the Arctic and countries in Africa, Asia, Latin America and
     the former USSR which have not been intensively explored. Recent big finds on theBrazilian continental shelf reinforce that optimism. Pessimists worry that production is falling behind demand growth and
     has peaked in those countries willing to produce more, leaving a greater dependence on the OPEC countries. They believe, furthermore,
     that OPEC has an incentive not to produce more but to let scarcity drive up the price, increasing the value of oil kept in
     the ground.
    This background is important in order to understand what has been happening in this century. Until the oil market crashed
     in the latter part of 2008, there had been a steady upward climb. This can be traced back to the day in December 1998, when
     oil prices fell to $10 per barrel, following a decade of low prices that had left the industry worrying that oil was becoming,
     as in the 1950s and 1960s, just another superabundant primary commodity, like coffee – not worth prospecting for in a world
     where production costs in difficult offshore fields and other ‘new-frontier’ exploration areas could be as much as $30–40
     per barrel. Oil prices then started moving discernibly upwards from just over $25 in mid-2003 and broke through to $40 in
     May 2004. Newspaper stories started to appear about ‘the next great oil shock’ (
Financial

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