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Wednesday, December 7, 2011
The International Energy Agency has again warned that the high oil price could strangle hopes for a global economic recovery. It also says that 90% of future growth in oil production has to come from the Mid-East, mostly from Saudi Arabia. Without a $100 billion annual investment in that region, oil prices will exceed $150 a barrel. But Saudi Arabia has just announced it is halting its $100 billion oil expansion program? This does not compute.
The IEA's Fatih Birol said the world economy was in a more fragile state now than during the crisis of 2008-2009. 2011 has been a record year for oil with Brent crude at its highest-ever average above $110 per barrel. This is the highest annual oil price since 1864, during the American Civil War.
Birol said Europe was especially at risk from the high oil price, but that it could also turn into a major problem for energy-hungry Asia.
"It is a major risk for the slowdown of the economic growth in Asian countries which were the countries which brought us out of the financial crisis in 2008," said Birol.
With New Zealand so reliant on China, and the rest of Asia, the implications for us are huge.
Lack of Investment or lack of oil?
The immediate future of oil production is seen by as one of adequate investment. The IEA says that the Middle East and North Africa will need at least $100 billion a year in new investment for the foreseeable future even in a place where oil is still cheap to exploit. The problem, however, is that the rising expectations of Arab Spring is rapidly shifting oil revenues from investment in more oil production to the kinds of social spending that will keep people happy and out of the streets.
In the closest the IEA comes to predicting peak oil, Birol says that without major increases in investment (an increasingly unlikely occurrence), Middle Eastern oil production will fall sharply leading to oil prices in excess of $150 a barrel - until of course demand slumps from the high prices.
Meanwhile in the same week as the IEA was stating 90% of future oil production must come from the Mid-East, Saudi Arabia announced that it is halting its $100bn oil expansion programme, claiming that the requirement for the kingdom to increase production has "substantially reduced" in the face of emerging new oil and gas supplies.
"Has the Kingdom already reached peak production capacity as it struggles to replace depleting supplies? Is this a case of budgetary priorities shifting as Saudi moves spending to social programmes to avoid contagion of unrest from neighbouring countries? "
This does not compute
Who is wrong? My pick is that Saudi Arabia is the emperor with no clothes, or in this case with no extra oil to pump. It cannot yet admit that it is close to its maximum production capacity, and is using the much hyped development of unconventional oil in the US and Canada as a convenient excuse .
But if the Saudi production stalls out at present levels, while the IEA warns we rely on them and other Mid East producers for 90% of future production then obviously something does not compute.
The only realistic conclusion is that oil prices will stay high and move even higher until the global economy falls back into recession or even depression and chokes off demand. And a recession/depression could be coming to an economy near you, sooner than you imagine.