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  Business Times 22 Jun 07
Days of cheap fuel are gone for good
Crude prices have been generally on the uptrend since 2002 and are now near their records By G Panicker

APEC energy ministers recently sought to improve transparency in the energy market. At a meeting in Darwin, Australia, last month, it was decided that all energy companies, including national oil companies, need to cooperate in this matter.

Given that the Asia Pacific Economic Cooperation forum members consume 60 per cent of the world's oil production and will require to import more than half its needs by 2030, the ministers decided that a free flow of oil and gas products across borders would be in the interest of everyone.

Why this sudden outbreak of concern, you ask?

More oil reserves are now state controlled, not only in the Gulf states but in Russia and Venezuela as well.

'It is a problem that private, international oil companies find it difficult to develop reserves,' Claude Mandil, the International Energy Agency's executive director, told Bloomberg last month.

'Partnerships of state-owned controlled and private oil companies are needed, but the way to cooperate hasn't been invented.'

While Apec seeks better cooperation between oil and gas companies in energy trade, it has also called upon member countries to improve energy efficiency by setting individual goals and developing cleaner and efficient power generation technologies.

Crude prices have been generally on the uptrend since 2002 and now near their records. No one expects the oil price to go back to US$20 a barrel, its long-term average. This year alone, prices are up 40 per cent from a January low of US$50.

In the past, Opec stepped in to rein in prices. This time around, with a weak US dollar, there is no sign the Organization of the Petroleum Exporting Countries (Opec) is even thinking of restoring the cuts it imposed late last year.

Opec says there is plenty of oil and the bottleneck lies in the capacity to refine the crude.

Politics has always influenced the oil price, but now there is an added dimension.

There are tough words between Washington and Moscow, harking back to the Cold War days. Russia recently tested an ICBM to send a message to the United States over its plans to set up a radar and missile defence in Czechoslovakia and Poland.

Russia sees this as a threat. If they are indeed meant to stop Iranian missiles, Russian President Vladimir Putin suggests that the anti-missile shield be placed in Azerbaijan under joint supervision. Mr Putin also warned that Europe could again be targeted by Russian missiles.

The tough words jolted oil prices.

The Russians are also not making it easy for the US to confront Iran. Teheran has ignored UN Security Council resolutions that want Iran to abandon uranium enrichment. Now Iran says it is too late in the day to turn back in its enrichment drive which, it says, is meant for power production but which the West believes is a route to weaponisation.

Iran has also fired a salvo of counter threats against sanctions that have unnerved oil markets.

As well, in an apparent endorsement of resource nationalism, the Kremlin, flush with oil cash, has used its state power to take possession of energy reserves, clipping the wings of Western oil companies such as Shell.

This action is similar to what Venezuela - which is a major supplier to the United States - has done in Latin America.

Yet another development that has shaken oil markets is Turkey's recent incursion into Kurdish areas in Iraq in pursuit of rebel groups. A full scale Turkish attack will shatter the relative quiet in northern Iraq, where the Kirkurk oil field is located.

Political developments in Gaza also help to swell the instability worries about the Middle East.

Combine the new geopolitical situation with soaring oil demand, loss of output in Iraq following the American invasion and occupation, continued loss of production in Nigeria because of political unrest and Opec's own manoeuvres with its production plans, and you get a tough oil supply situation.

On the demand side, China and India are weighing in.

The International Energy Agency, watching for the West, wants to work with Beijing to tackle future supply crises, so important is Chinese consumption.

On top of everything, global warming looms.

Even US President GeorgeWBush has recognised the science. Of course, he still may pose no threat to oil producers, who can probably depend on him to block any bill to prosecute Opec under anti-trust laws.

Still, his offer even to lead the post-Kyoto talks at the G-8 and hold parleys with 15 top polluters to help evolve a post-Kyoto strategy should be unsettling enough to oil producers.

Meanwhile, an energy bill is snaking through the US Senate to fund US$11 billion in renewable fuel development over 10 years while eliminating tax credits involving foreign oil production.

The surge in private sector investment in alternative energy and a European Union determined to tackle global warming are also no good news for the oil producers.

Though the world did not get a G-8 commitment on specific steep reduction targets on energy use, the EU, now lead by Germany, is seeking a 20 per cent reduction in energy use by 2020. Mr Bush too has talked about reducing 20 per cent of oil use in 10 years through energy efficiencies and ethanol.

Nature demands action, depleting ice in the Arctic and setting off ever more devastating storms, floods and droughts. Massive hurricanes like Katrina have delivered a rude awakening on oil dependency and new climate realities to the Americans.

And as though giving a sign to another set of doubters of the climate science, a fierce storm hit Muscat in the Sultanate of Oman while sparing other countries recently. That was the first storm of that scale in 60 years.

The price jump that came with the storm passed with the wind but will return as the hurricane season in the US progresses.

A movement for alternatives like biofuel is snowballing and demand for hybrid cars is soaring.

Neither are a panacea to contain global warming.

Biofuel crops occupy land the size of France. The US and Brazil produce three-fourths of the world's supply. Toyota's hybrid car sales just totalled a million this year since it went into production. It hopes to sell a million such cars in 2010 alone.

All these movements have unnerved oil producers.

An alarmed Opec has threatened to cut investment in oil prospecting and discovery. Saudi Arabia - the biggest oil exporter - has been particularly vocal.

And Opec is not alone. Even big oil companies are debating whether they should invest in new refineries if ethanol and other programmes are pushed through.

For consumers, the message from all this is loud and clear. Cheap energy is gone for good.
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