Cover Article

Sky Scraping World Oil Price
Khondkar Abdus Saleque

Middle East remains turbulent. Sectarian violence in Iraq is getting ominous. George Bush is under tremendous all round pressure to retreat from Iraq. Afghanistan is boiling again. Situation in Pakistan is like a pressure cooker. Turkey is striking the Kurdish PKK guerrillas across the border into Iraq. On the backdrop of these, oil price is skyrocketing every passing day. It is already in the nervous ninety and is well on course to achieve the maiden century milestone any time. The author has very closely followed the weekly oil price of various crude over the last few weeks. It is following a regular upward trend. If it continues to remain like this the developing and underdeveloped economy will have serious impact very soon. 

The oil price now has even exceeded the high price scenario shown in EIA’s Annual Energy Outlook 2007. The reference case according to the outlook stated a decline of oil price from $68 per barrel in 2006 to $49 per barrel in 2014, then rise to $59 per barrel in 2030 ($95 per barrel on a nominal basis). In low price case, world oil prices are projected to be $36 per barrel in 2030 ($58 per barrel on nominal basis). In the high price case, oil prices are projected to be $100 per barrel in 2030 ($157 per barrel on a nominal basis). It is November 2007 when the oil price reached $100, which according to high scenario is projected for 2030. This sudden surge of oil price may upset many economy, may cause economic recession in many parts of the world. Countries like Bangladesh, which rely so much on imported oil, may face serious situation to cope up with surging oil price and consequential impacts on economy.

It is true that oil prices are notoriously difficult to predict. Even the most sophisticated forecasting models cannot account for all the variables and broad ranges in the forecast results are expected. The EIA Annual Energy Outlook forecasts are routinely used in regulatory proceedings, budget projections, energy facility planning, scientific research, investment decisions, and litigation and energy policy decisions. Given the widespread use of EIA forecasts, it is clear that a systematic bias in its results can have profound implications not only in the US, but in other nations as well. The National Energy Board in Canada uses EIA forecasts. Even OPEC scholars use EIA projections as a benchmark in their research.

May be the current surge in the oil price is purely temporary. US dollar is relatively weaker for several reasons. This has also contributed to this situation. But the commodity market is very much oil price indexed. Hence the price of food grains and other commodities are increasing in the world market every day ringing alarm bells in many countries.

How can this situation be remedied? Will a careful increase of production by OPEC countries for a while comfort the situation? The price of oil during the US led so called “War on Terror “even did not take the oil price to this level. Now USA is flexing muscles to have a go at Iran. Just imagine what can be the consequence of it? Forget about the possibility of World War III or probable nuclear confrontation, the price of oil will reach a level which may be impossible for the fragile economy of many nations to bear. 

Let us examine the IEA 2007 a little deeper. The report predicts in the reference case world consumption of petroleum and other liquid fuel to grow from 83 million barrels per day in 2004 to 94 million barrels per day in 2015 and 118 million in 2030. It also predicted that the oil price would remain above $49 per barrel throughout the period. Much of the overall increase in liquids consumption is projected for the nations of non-OECD Asia, where strong economic growth is expected.

To meet the above increase the IEO 2007 reference case predicts that the liquid production is to increase by 14 million barrels per day from 2004 to 2015 and by an additional 20 million barrels per day from 2015 to 2030. OPEC producers are expected to provide more than half of the additional production in 2015 (8 million barrels per day) and more than two third in 2030 (23 million barrels per day). In reference case projections, sustained high world oil prices support a substantial increase in non-OPEC liquids production. Non-OPEC production in 2030 is projected to be 12 million barrels per day higher than in 2004, representing 35% of the increase in total world oil production over the 2004 total. The estimates of production increases are based on current proved reserves and country by country assessment of ultimate recoverable petroleum, as well as potential unconventional liquids production.

The world oil prices in IEO 2007 reference case and in the high world oil prices case are also projected to make previously uneconomical, unconventional resources available. In 2004, world production of unconventional liquids totaled only 2.6 million barrels per day; in 2030, in the reference case, unconventional liquids production totals 10.5 million barrels per day and accounts for nearly 9% of total world liquid production.

Gas to liquids, Coal to Liquids, Biofuels, Ultra Heavy Crudes and Canadian Oil Sands are the major unconventional liquids, which now require greater attention. The increase in unconventional liquid production depends on access of the technology for many developing countries. Qatar is potentially a significantly large producer gas to liquid. It has huge reserve of natural gas. In recent time it could not work out any major deal with aspirant countries like India for other modes of gas transport. The author during a short visit to that country in 2005 observed major growth of gas to liquid plant in the RAS Raffan City. Other countries like Iran and Turkmenistan, which are facing difficulties in transporting their gas to neighboring countries through pipelines, may also think of Gas to Liquids.

Coal to Liquid is another viable option. Extensive use of coal is creating huge GHG emissions. If substantial portion of coal can be converted to oil and used as substitute of crude it may not only impact on soaring oil price but can reduce GHG emissions to some extent. South Africa is the pioneer of this. SASOL started this. World reserve of coal can be better utilized in a much more environmentally friendly way if more and more coal is converted to liquid. Countries like Australia, USA, and Germany have huge reserves of coal. Many developing and underdeveloped countries like China, India, and Indonesia have significant reserve of coal. Coal burning in the traditional way cause significant GHG emissions. It can be cut down to comfortable level if a major portion of coal can be converted to liquids. But to make that happen the technology has to be accessed by these countries.

Bio fuel is another option which now deserves special attention. It is true for growing the plants to produce the plants for bio fuel some cultivable land may be affected. 

Agriculturists and economists are opposing this. But many large countries have huge arid lands where these plants may grow. We must also realize what we need most energy to survive or food to live. We can buy food if we can offset our foreign currency expenditure in expensive fuel import. We must strike a balance. Think of Bangladesh. Many areas of Chittagong, Sylhet and Rajshahi divisions can be used for plants to produce bio fuels and in three to five years Bangladesh may produce significant amount of bio fuels. India and China can produce bio fuels to meet at least 10% of its liquid fuel demand likewise.

Canadian Oil Sands can meet the demand for Canada and USA for a long time. Similarly the energy world must also ponder how to utilize the ultra heavy crude. We must remember the time of easy oil is gone. We may discover some more significant oil reserve. But it will be more and more capital intensive to explore and exploit and will be more and more expensive.

Let us now discuss the present and projected scenario of Worlds Liquids Production. In IEO 2007 reference case, world liquids production in 2030 exceeds the 2004 level by 35 million barrels per day. Increases will happen both in OPEC and Non-OPEC countries. The OPEC countries will account for about 65% of the increase. In 2030, OPEC countries are expected to produce 57 million barrels per day and non-OPEC producers 61 million barrels per day in reference case. Over the last two decades, the growth in non- OPEC liquids production has resulted in an OPEC market share substantially below its high of 52% in 1973. In 2004, OPEC produced 41 % of world’s liquids supply. High oil prices, new exploration and production technologies, aggressive cost reduction programs by industry, and emergence of unconventional resources contribute the outlook for continued growth in non-OPEC liquids production.

The IEO 2007 reference case outlook for liquids production has been formulated in two stages. The mid- term projections are based primarily on the current activities of the oil industry and national governments, including: current production volumes; recent rate decline in output from producing fields; planned exploration, developments, and enhanced oil recovery activities; country-specific policies and fiscal regimes; and current conflicts and social unrest that could interrupt production and make incremental investments more risky. After 2015, the reference case assumes that production decisions are made primarily on economic grounds, based on assessments of the resources base, with less weight placed on current political conditions.

World’s liquids consumption in the IEO 2007 reference case increases to 118 million barrels per day (239 quadrillion Btu) in 2030, as world continues to experience strong economic growth. Two-thirds of increment in world liquids consumption is projected for use in the transportation sector, where there are few alternatives to petroleum. The industrial sector accounts for 27% share of the projected increase, mostly for use in chemical and petroleum processes. The largest increases in consumption are projected for North America and non-OECD Asia, at 7 and 15 Million barrels per day. Non- OECD Asia accounts for 43 % of the overall increase in world liquid consumption with projected increases of 6.5 million barrels per day from 2004 to 2015 and another 8.5 million barrels per day from 2015 to 2030. China, India and other nations are expected to experience combined economic growth of 5.8 % per year from 2004 to 2015, the highest among all world regions.

Having discussed the above can anyone visualize a political tension free world after 2015? The present situation is largely due to Bush-Blair excesses in Iraq in the name of “War on Terror”. Saddam Hussain was definitely an autocrat. But there are many greater autocrats in the world sponsored by the so-called champions of free world. Saddam was somehow able to control the country having three distinct feuding ethnic groups. Iraq was one of more sensible countries of the Arab World. He did not possess any weapons of mass destruction and apparently no link with Al-Qaeda. Intelligence reports were fabricated. How much USA and allies gained from the war. Many families lost their dear ones. The major cities and citizens have become target of suicide bombing. The world has become unsafe. Billions of dollars are to be dedicated for security all over. It is now crystal clears that war mongers Dick Cheney and Condoleezza Rice under influence of oil mafias misguided Bush into the war. Well Saddam is gone. But can USA and its ally’s manage the situation there? Why should US citizens sacrifice their lives in the sectarian violences? Free world must take all these into consideration.

Now USA is creating unhealthy situation in Iran. These are basically nothing but gaining control on oil resources of the area. Do not understand why American, British and European soldiers have to lay their lives in Iraq and Iran without any definite purpose? It is impossible for them to achieve any objective. These are terrorism on foreign soil in the name of war on terror. Citizens of all these countries are against war. UK is withdrawing from Iraq, some West European countries are also actively considering to withdraw; very soon Australia will follow them. USA will definitely not win this war. The damage is already done. If they try further adventurism in Iran it may trigger nuclear war as Russia and China may get involved.

Political tensions apart from the rapid economic growth of non-OPEC developing economy is responsible for oil surge. If political tensions were not there China and India could access the natural gas & other energy resources of Iran, Qatar and breakaway Russian republic. Lot of pressure on the depleting oil resources could be eased. Who should be blamed for these?

Bangladesh will be a major suffer if it does not address the situation in a much-planned manner. Already the prices of essentials have gone way above common peoples reach. The prices of commodities have direct links with increased oil price in the world market. If now our government increases the price of petroleum products it will further increase the prices of essentials. But we have no choice. 

Bangladesh can no longer keep on importing liquid petroleum at the soaring world price and market this at subsidized price. The oil price must be logically adjusted gradually. Simultaneously the dependence on petroleum products needs to be lessened. Massive initiative is required to expand the CNG utilization in automobiles. Use of automobiles in major cities should also be carefully restricted. The ongoing drive against corruption has already made an impact on the use of high powered less fuel-efficient automobiles. CNG driven public transport fleets must be increased in the cities and inter city movement. Research must be aggressively made to find out technology to use CNG in irrigation pumps, Railway engines and river vessels. Massive exploration for gas and oil must be taken up immediately to prove the existing reserve further and discover new reserves.

Coal exploration must start in the most economic method to recover most of it. Coal exploration issue must be resolved soon. May also vigorously pursue the coal too gas and coal to liquid technology, we must also start extensive exploitation of bio fuel option. If the current market trend of world oil continues Bangladesh may face serious crisis in not too distant future. We are lucky we have gas. We have coal but we are not so lucky as section of our poorly motivated intelligentsia is objecting to the most economic method of exploitation. We continue to remain bogged down in our efforts for coal exploration.

In the backdrop of surging world oil market let us set our immediate and long term priorities. The caretaker government must finalize the new national energy policy keeping in view the volatile world oil market and it’s far reaching impact on Bangladesh economy. We must plan actions and contingency measures to address any situation.