Monday, December 10, 2007

Sine Qua Non

In order to function, a market must have both buyers and sellers. That point seems trivial, but in the context of an article in Sunday's New York Times, it has great significance for the global trade in oil. The Times picked up on a quiet trend that could dramatically alter the oil market, and with it, the global economy: the rate at which the economies of oil-exporting countries are soaking up their oil surpluses, due to a combination of subsidized consumption and the growth stimulated by high oil revenues. Even if this trend does not dry up the exports that currently satisfy the world's many oil importers--with the US topping the list--it will alter the competitive forces affecting both energy prices and the contractual terms for new production. It should also lend urgency to the national debate on energy policy.

Since participating in Texaco's first global energy scenario project ten years ago, I've been following the evolution of the industry's access to resources, one of three big energy trends identified by our scenario team. Increasingly, the international oil companies have been frozen out of the big reserve plays around the world, or forced to take secondary roles involving much less control. But within the last year, I've grown much more concerned about the potential impact of a factor that compounds the problem of access. As oil-rich developing countries grow, they consume more of their own oil, leaving less to export. And as often as not, much of that incremental consumption is driven by internal petroleum product prices that are well below international market prices, leading to inefficiency.

The 15 countries on the Department of Energy's list of the biggest oil exporters accounted for 90% of total global oil exports of 43.2 million barrels per day (MBD) in 2004, out of total consumption of 82.3 MBD. As the figure in the Times article shows, consumption in the largest of these exporters is growing at a multiple of the global rate, at a time when it has slowed or stalled in developed countries. (The decline shown for the US between 2005-2006 is somewhat anomalous, because it appears to be attributable not to products like gasoline or diesel fuel, which are still growing, but to the disposition of the bottom of the barrel, perhaps into additional coking capacity or exports.) In fact, the growth of consumption in oil-exporting countries may matter as much to the future of the oil market as the growth of China and India, which has received a lot more attention in the last several years.

This trend has a number of important implications. At the highest level, as the Times notes, a reduction of exports will put more pressure on prices, and thus on consumption in importing countries, effectively hastening the effects of Peak Oil. At the same time, a reduction in the number of net exporters, as countries with historic surpluses move into balance or deficit, will alter the dynamics of the market, as will shifts within the top rank of exporters. The resulting fewer major exporters will have more market power, and that will affect not only the market for their output, but also the competition for access to new oil fields. Meanwhile, the incentives for current oil importers to reduce consumption and develop more domestic production will grow, encompassing biofuels and hydrocarbons from conventional and alternative sources. In this light, the present high US reliance on oil imports looks even less sustainable, and a comprehensive energy plan addressing both supply and demand even more essential.

It isn't for us to tell oil-producing nations what to do with their own resources. We have no inalienable right to consume other countries' oil, unless they sell it to us willingly. Nor are we in a strong position to advise them about inefficiency, at least until we put our own house in order in this regard. That suggests the need for us to plan for a world, not necessarily with less oil, but with less of it available for us to import. Considering the scale of those imports and the present modest contribution of alternatives, the definition of energy independence we should all be able to agree on would focus on achieving sustained year-on-year reductions in our oil imports and creating enough new options to provide real leverage with our remaining suppliers. That's a very different notion from self-sufficiency.

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