Missed this earlier today, but the editorial in today’s FT by BP CEO Tony Hayward is worth reading in its entirety. He beats up on three myths, as he calls them, largely having to do with the role of speculators in the current price run-up; the idea that we are close to running out of hydrocarbons; and that we can switch quickly to a low-carbon economy.
For my money he is less convincing on points two and three, but he makes sense on point one. Resource nationalism is a big issue, as is under-investment — even if I loathe the line of rhetoric that says our problems are above the ground, not below — and that needs to change speedily. Trouble is, with countries seeing massive revenue increases from increased price, and thus not needing to invest and produce more, there is little incentive to spend, even at these high price levels. Strangely enough, it means there is little incentive to invest when prices are high, as above, and there is little incentive to invest when prices are low, for obvious reasons. Welcome to the strange and messed-up global oil market.
Here he is on the market’s fundamentals:
Yet energy supply has struggled to respond. Production by the Organisation of the Petroleum Exporting Countries fell by 350,000 barrels of oil a day last year. The production situation is even more challenging in the market-oriented nations of the Organisation for Economic Co-operation and Development, where many existing basins are maturing fast. In Britain, for instance, North Sea gas production recorded the world’s lar-gest decline for the second year in a row, falling by 10 per cent in 2007. UK oil output rose very slightly, but this is a one-off, based on a single big new field. Production remains on a downward trend.
The last time oil prices surged to this kind of level, 30 years ago, new production from the North Sea helped bring prices down. This time, new OECD production will have to come from frontier provinces such as the Canadian oil sands, the Arctic and the deep waters of the Gulf of Mexico.
Another big impact on supply is Russia, where production has begun to decline. It is a little-known fact that, until now, the growing demand for oil from China and India in recent years has been met almost barrel for barrel by rising supply from Russia.
As an aside, Hayward says the new BP Statistical Review of World Energy is out, but I only see last year’s edition.