Fog of war obscures way ahead for black gold
By Alf Young
The price of oil was all over the place yesterday. First Brent crude touched a fresh peak of $78.18 a barrel, territory last explored on Friday, as the conflict between Israel and Lebanon escalated. Then the Brent barrel price subsided down towards $76, apparently on the back of a fleeting shaft of better news from the Middle East.
An Israeli military source had been quoted as saying the country could end its northern offensive within days. That report was quickly denied. And nothing that followed - more of Beirut reduced to rubble, more Hizbollah rockets raining down on northern Israeli towns like Haifa - seemed to offer any grounds for optimism.
No doubt the global oil price will continue to gyrate wildly in the days and weeks ahead. Such volatility is no surprise amidst the fog of war. Especially warfare in the Middle East, the part of the world where major outbreaks of armed conflict have consistently brought energy crises in their wake.
The Yom Kippur war in 1973; the start of the Iran-Iraq war in 1980; the First Gulf war at the start of the 1990s; and the invasion of Iraq by America and its allies in 2003 have all sent the oil price soaring. Past conflict-driven peaks have always subsided. However, slowly but surely, the baseline has been pushed higher.
And because of an accident of timing, the current surge is reawakening deeper fears - that the price of oil has only one way to go now. Up and up and up. Publishers' lists, especially on the other side of the Atlantic, are full of apocalyptic titles like Petrodollar Warfare, The Party's Over and The Coming Economic Collapse.
Forget $76 or $78 a barrel. More and more players in the oil business are resigned to facing the $100 barrel before long. Others talk openly of the $200 - or even the $300 - barrel. But war and global conflict are not regarded as the main drivers in this seemingly inexorable price surge.
The problem lies with the finite nature of the oil itself. We are, they tell us, in the era of peak oil. In other words, we are nearing the moment when there is less oil still to be discovered anywhere on our planet than we have already found and exploited.
If oil is a finite resource, the story of oil production ought to follow a bell curve. In the early years of the hydrocarbon economy, demand was still way down in the foothills of the curve's upslope. As more and more oil was discovered, production rose strongly to meet mounting demand.
Despite the price shocks of the 1970s, 1980s and 1990s, the underlying message was that oil was plentiful. The good times could roll and roll. But now we are near the peak of the bell curve. Some argue we may already have arrived. In its 2004 outlook, the International Energy Agency noted oil production was already in decline in 33 of the 48 largest oil producing nations.
The next chapter in the story lies on the bell curve's downslope. Oil becomes more and more scarce, especially in a world where demand from China alone is expected to grow by 7.5% a year for the next couple of decades. And so it will also become more and more expensive.
Unless the world finds credible alternatives to its dependency on oil or comes up with other sources of hydrocarbons, the economic shocks that await us on the journey down the other side of the bell curve will make the experience of all those conflicts in the latter half of the 20th century pale into insignificance.
The concept of peak oil idea has been around almost as long as the exploitation of crude oil itself. It is also know as Hubbert's peak theory, named after the American geophysicist Marion King Hubbert, who first proposed it in a paper to the American Petroleum Institute way back in 1956.
Hubbert thought the worldwide peak would be reached about half-a-century after he spoke. That is, round about now. His followers have even speculated it might have come even earlier. But now there's a growing recognition that the peak may be delayed a little - to 2010 at the earliest, perhaps even as late as 2025.
There's even an Association for the Study of Peak Oil and Gas which is opening its fifth annual international conference this morning, in Pisa. Perversely, it was doing its bit to advance that peak by accepting conference bookings on its website right up until the last moment.
Peak oil adherents attract conspiracy theorists. About politicians who want to hide the stark truth from their peoples. About Big Oil, running down investment in exploration and refining capacity and merging like mad into even Bigger Oil, because it secretly knows the crunch is coming.
What we don't yet know is how technological ingenuity - more exhaustive recovery of known reserves; greater exploitation of tar sands like those in western Canada; greater production and use of biodiesel; hydrogen propulsion and a host of other ideas - might alter the story in terms of both demand and price on the downslope of the crude oil curve.