Oil goes on binge while we seek sober clarity
September 11, 2008
By INGI SALGADO
As oil prices crossed the threshold into triple-digit figures this year, peak oil was taking its place as more than just a theory that the world would run out of sufficient quantities of oil that was financially viable to extract. But it is more likely as an eventuality that would come to pass, probably within a decade.
An upward price trajectory for oil made it far easier to understand the link between prices and energy resource depletion, even though peak oil analysts cautioned that recession was bound to follow a price spike, thus reducing demand and lowering prices. This in turn would cause further price hikes, setting in motion a roller-coaster effect.
It now seems clear that price volatility is indeed going to be the wild card in this game. When oil hit a July high of $147 a barrel (R1 180 a litre at yesterday's exchange rate), it seemed plausible that $200 a barrel was within sight. But barely two months later a barrel costs about a third less and the target within strike is now $100 (an inconceivable price just a few years ago).
A fundamental analysis tells us that prices have been falling on concerns of slower global growth, coinciding with the biggest drop in oil demand in the US in a quarter of a century, as higher fuel prices influenced American motorists' summer holiday plans.
Nevertheless, fundamentals do not fully explain the speed with which oil bubbled close to $150 and back down again.
There is, we are told, still enough oil being produced to meet global demand, which remains 500 000 barrels a day higher than last year, despite the dent in US consumption. Other reasons range from investors leaving the market to allegations of the US government's intervention in the market for crude.
Oil producers, such as Iran, have now deemed the market oversupplied.
It is unclear whether Saudi Arabia, which raised output to its highest level in 25 years in July, concurs with a view to restricting output. Its decision will dictate the next move in the price game.
Richard Heinberg, a peak oil author and senior fellow of the Post Carbon Institute, says markets are able to give the occasional useful warning sign to alert us to the plight of resource depletion, "a bit like the broken clock that tells perfect time twice a day".
Markets provide no help at all in preparing for the inevitable decline in oil production, he says.
In short, the oil price is not going to provide us with the answers we need to harness sufficient quantities of sustainable energy (and its volatility should remind us not to tie the funding of renewable energy projects too closely to oil prices).
The price is also offering few answers to manufacturers of oil-based products.
While the latest decline eases the fuel burden for motorists, producers of goods from tyres to personal care products are in a quandary about whether to commit to price cuts, unsure whether they are experiencing a temporary lull before the onslaught of higher prices.
It may suit them to say this, but nobody knows where oil prices are headed on a daily basis, even though the fundamental cause of higher prices remains - that global demand continues to rise out of kilter with supply.
And unless something drastic happens to change this imbalance, oil prices will probably resume their drunken stagger towards higher levels.
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