Gwynne Dyer, Contributor
"WE RAN out of US$2 oil in 1973," said Henry Groppe of Groppe Long and Littel, at 79 the oldest active oil consultant (and one of the most respected) in the business. " Then we ran out of US$8 oil, then US$15 oil. Now we're running out of US$40 oil." It's a different way of looking at what is happening to the price of oil, and a much more useful one.
Last week the price of a barrel of oil reached US$65. Oil has doubled in price in the past eighteen months, and oil industry experts freely speculate that the price might hit US$80, even US$100 a barrel before year's end, hugely depressing world economic growth.
MAKING DECISIONS
But here's an interesting fact. Oil companies still decide whether a new field is worth developing by calculating whether they would turn a profit from it when the price per barrel falls to only US$25. Do they know something that the rest of us don't?
Not really. They just know that prices always fluctuate, that swings in commodity prices tend to be much wider than in other goods - and therefore that "running out of US$40 oil" doesn't mean that the oil price will never fall below US$40 again. It won't stay down there for good, but as John Maynard Keynes once remarked, "markets can remain irrational longer than you can remain solvent." You have to be able to make a profit from your new field when oil drops to $30 a barrel (even if it is for the last time) and stays there for a couple of years.
PRICES MAY DROP
The price of oil may hit US$80 or even US$100 this year, but if it does it will be an extreme market fluctuation, not a new average price. It will eventually fall back towards the US$40-$55 band - but "eventually" is the key word as far as the current global economic boom is concerned.
Despite low growth in Japan and most of the eurozone, the global economy as a whole grew at an unprecedented annual rate of 4.5 per cent over the past eighteen months. The rule of thumb says that US$20 on the oil price means a drop of one percent in global growth six months to a year later, so we aren't in bad trouble yet.
Oil prices have gone up around US$30 in 18 months - one and a half per cent off the growth rate - but some of that lost growth is already accounted for in that remarkable 4.5 per cent figure. If the oil price stabilised now, the world economy would still be growing at a comfortable 3 per cent after the rest of the damage feeds through.
If, on the other hand, oil goes up to US$100 and stays there for a year or two, that's another 2 per cent off the growth rate, and then everybody hurts. The current growth spurt is bound to end sooner or later - they haven't abolished the economic cycle yet - but sharp swings in the oil price don't necessarily mean that we are headed for an especially severe recession. Nor have we any reason to think that the oil price will stay up in the stratosphere forever.
After all the current turmoil is past, the important thing is that the median oil price for the next half-decade, say (until we run out of ALL the US$40 oil) will be in the mid-US$40s. That is good news in terms of the real crisis, climate change.
GLOBAL CLIMATE DISASTER
It's high enough to encourage energy conservation and drive people towards alternative, preferably non-carbon energy sources, but it doesn't actually paralyse the economy. We will need more pressure from a higher price later on if we are to avoid a global climate disaster, but the economy can only respond so fast. And we are practically guaranteed a higher price later on - another doubling of the average price by 2010 or 2012, say - because we are probably at peak oil production right now.
Seventy percent of the world's oil comes from big fields that were discovered before 1970, and they are almost all in decline. The new discoveries are mostly smaller and more expensive to develop, and Henry Groppe recently predicted that oil production worldwide will decline by a million barrels a day each year from now on.
We can take no credit for it, but maybe we are on the best available glide-path for a soft landing on climate change. Whether that will be good enough is, of course, another question.
Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.
