Australia will need to grapple with a forecast oil price of around US$200 a barrel as overseas economies recover from the Global Financial Crisis (GFC), according to an international energy expert visiting Adelaide.
Part of the price hike blame, the expert warns, can be laid at the feet of national and international oil companies for their inadequate investment in hydrocarbon exploration, development and infrastructure over many years.
Professor Paul Stevens - whose visit has been sponsored by the energy education and sector commentator specialist, the University College London’s newly established Australian campus in Adelaide - said the US$200 per barrel horizon could be reached within five to 10 years “but more likely nearer five”.
“The reasons for such a price curveball rest partly in the possible emergence of tightness between spare capacity to produce crude and stronger demand as the Australian and other modern economies recover from the global recession.
“This increasing supply-demand dynamic will be further frustrated by the wrong and illogical guessing by “Paper Barrel Oil Markets “ - the money managers such as those in charge of super funds - who invest in oil futures but who have no real grasp of the factors governing oil price and supply.
“Yet their bad decisions have an undue influence on price settings in the “Wet Barrel Market” - those oil markets that actually deal in real barrels of oil.
“Combined with the difficulties of OPEC producers in controlling output - and it was as recent as 2004 that any excess oil capacity disappeared globally - this could force prices above the 2008 records of around US$140 a barrel and well towards US$200.
“The ramifications of this on energy and economic policy making in Australia – a net oil importer and where the Prime Minister has embraced the “gesture politics of the UK and the US in terms of energy – then the economic impacts will be significant. The same pressure points will be being felt in other like economies.”
Professor Stevens warned that the price hike would come despite the current market where world oil inventories are full, the impacts of the recession had dampened oil demand and how this “appeared” to have led to much lower oil prices.
“In the short-term, I expect oil prices could go even lower during the rest of this year,” Professor Stevens said.
“However, as the world emerges from recession and oil demand begins to grow again, the recent inadequate investment in the industry both by international oil companies and national oil companies will lead to the “supply crunch”, a very sharp spike in oil prices and serious consequences for the world economy and for the development of energy policy in many countries.
"This inadequate investment means recent global spare crude oil producing capacity will be quickly eroded. It will only take some geopolitical event to cause a supply outage – adding to the price pressure and pushing prices towards $200 per barrel.
Professor Stevens pointed out how the major oil companies in recent years have returned massive funds to shareholders instead of re-investing greater portions of those funds in new infrastructure and field development.
“In 2005 for example, the world’s six largest oil companies invested US$54 billion in new projects - but gave back US$71 billion to shareholders in the hope that this created ‘shareholder value’,” Professor Stevens said.
“As a result, very few national and international companies have tried to invest through the down cycle.
“This worsens price and energy policy outcomes at national level particularly as national oil companies globally control more than 70% of the world’s oil reserves – and therefore the welfare of how those reserves contribute to national economies on a timely basis.
“And this at a time when many national governments have adopted in the wake of the sub-prime housing collapse and the GFC, a preference to “leave it in the ground” as the safest value builder, or alternatively, adopting resource nationalism where they are reluctant to allow other companies to come in and invest and develop domestic oil and resources assets.
“The combined result globally and in Australia of such factors will be the eventual upwards price pressure.”
Professor Stevens will this week deliver the first of four international lectures planned in Adelaide for 2009 by the University College London and Australian oil and gas producer, Santos ahead of hosting a one day workshop in Adelaide tomorrow for Santos executives and management.
The lecture tour is part of the University College London’s aim to bring world-leading experts to Adelaide as South Australia strengthens its position as a key minerals and energy jurisdiction.
Professor Paul Stevens: Senior Research Fellow (Energy) at Chatham House (The Royal Institute of International Affairs) in London. Educated as an economist and as a specialist on the Middle East at Cambridge and the School of Oriental and African Studies; 1973-1979 teaching at the American University of Beirut in Lebanon interspersed with two years as an oil consultant; 1979-93 at the University of Surrey. Between 1993 and 2008, he was Professor of Petroleum Policy and Economics at the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland, a chair created by BP. He is now Professor Emeritus at the University of Dundee and Consulting Professor at Stanford University. Professor Stevens has published extensively on energy economics, the international petroleum industry, economic development issues and the political economy of the Gulf. He also works as a consultant for many companies and governments. In March 2009 he was presented with the OPEC Award in recognition of his outstanding work in the field of oil and energy research.