I will believe the Saudis don't see any upcoming problems with Ghawar when they cancel one of their projects due to low oil prices. If they continue to be full steam ahead with increasing their capacity then I think they are aware that Ghawar may not be as robust in 5 years time as they would like us to believe.
Joined: Apr 06, 2004 Posts: 257 Location: Sydney, Australia
Posted: Mon Jun 14, 2004 8:04 pm Post subject: Guardian Weekly - Oil: no need to hit panic button
This week's financial editorial in the UK Guardian Weekly was about oil. (Couldn't find a web version of the article, sorry).
Larry Elliot makes some interesting points about the financial aspects of a supply crunch. Just to give you an idea of the tone...
Quote:
...Welcome back to 1973.
At least that's what the more lurid reports suggest. Oil prices are not going to stop at their current record of $42 a barrel or even $50 a barrel, but are heading to $100 a barrel. A summer of discontent is inevitable as fuel protesters dust off their placards. As for the economy, the dizzying cost of energy will bring the whole edifice to its knees within months.
This is all rattling good fun, but most of it is utter piffle...
He goes on to say that while we are headed for a 'long-term energy challenge' (understatement of the decade, I know), economic meltdown is not looming. His first point is simply that adjusted for inflation oil prices are back to where they were in 1974 and only half the level of the late 1970s (yeah, yeah, we have all heard that line before).
His second point is slight more original. Basically he is saying that we are living in very different economic times. In his opinion inflationary pressures globally and domestically (UK) are nothing like 30 years ago because we are just moving out of weakness caused by the collapse of the market bubble at the end of the 1990s (as opposed to the un-interrupted post WWII growth prior to '70s). Mind you he lists these problems of the 70s that sound very familiar now: low interest rates, public spending rising, freely available credit, property speculation. The biggest difference though, was UK's average growth which had been at 2.5% on average for the past 100 years, jumped to 7.3% in 1973. (China?)
His third point (IMO the strongest) is the likely policy response to an oil shock. He says...
Quote:
...rising oil prices represent a transfer of purchasing power from consumers to producers. Businesses pay more to transport their goods and heat their premises, and they pass the extra costs on to customers. Back in 1973 workers were protected against increases in the cost of living by threshold agreements, whereby any increases in prices above a certain level triggered increases in wages. All this did was to ratchet up business costs still further, creating an inflationary spiral and a climate in which firms laid off workers in order to stay afloat. This was so-called stagflation - recession and inflation at the same time.
In today's climate, with independent central banks ruling the roost, there would be a somewhat different approach. Members of the Bank of England's Monetary policy committee say that they would be relaxed about higher oil prices provided businesses and employees took the increase on the chin. Any indication, however, of attempts by businesses to bump up prices or of pressure from workers for compensatory pay awards would result in swift pre-emptive increases in interest rates to damp down inflation.
He goes on to say that oil producers have no long-term interest in seeing the global economy going down the tubes. He expects demand to ease (partly because of high cost of energy) and supply stocks to replenish.
Quote:
If sustained at their current level oil prices may shave around half a percentage point off global growth this year. The hit to living standards will reduce growth in consumer spending but with world output expected to rise by more that 4%, the impact would not be enough to cause a full-blown recession.
But he concedes at the end of the article that all of the above is
Quote:
...subject to one crucial caveat: secure oil supplies from a stable Saudi Arabia...
...Muslim fundamentalists would render everything null and void. Evidence that the terrorists had switched their focus to oil installations would have a psychological impact on prices, probably pushing them to $50 a barrel...
...regime change akin to that in Iran, which precipitated the record real oil prices in the late 1970s, would threaten to keep them at a crippling high level for long enough t ensure damaging recession. It is the outcome feared by George Bush. The question is whether his actions have made it more or less likely .
My bold.
I think this guy needs an introduction to Matt Simmons. _________________ Ye shall know the truth, and the truth shall make you mad. - Aldous Huxley
I think he is talking more about oil prices it the short term, his outlook does not appear to spread to 2008 and beyond. I agree with his current analysis (whatever that is worth), those who are worrying about peak oil being here today are a little premature.
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