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Peak Oil Ain't Here To Stay - But Will the Markets Factor This In After 12 Months Of Unrelentless Upspiralling?

Angelique van Engelen - 4/18/2005

Oil prices which are feared to linger at their skyrocketing levels longer than ever and taking on the hallmarks of permanency are undermining the prospects of economic growth worldwide. Oil, as well as and cheap Chinese exports and an expected widening of US' trade deficit are likely going to be the factors slowing global economic growth from last year's 5+% to an estimated lower 4% this year. 'Peak oil' the often used term referring to oil prices of over 50 USD, a doubling over the past twelve months, is much discussed by the financial community, yet the Finance Ministers of the G7 meeting this weekend in Washington, made no reference to the precarious issue. The G7 is made up of the United States, Britain, Canada,France, Germany, Italy and Japan. It is believed that the ministers, who in their often rhethoric press releases after the meetings almost routinely refer to the oil price as reason for some concern -be it high or low- refrained from doing so last weekend because the markets are jittery enough as it is.

Yet there is not all that much reason to believe that the oil worries are justified. Experts in the field say that the oil price should necessarily stay this high permanently. Wallstreet firm Goldman Sachs, in a report quoted by news agency Al Jezeera, said recently that global production is not reaching any kind of plateau due to scarcety. "We are not subscribers to the theory that global oil supply has hit some magical inflection point that will result in permanent supply declines", it writes. The analysts say that there are large known quantities of both conventional and unconventional oil resources to develop.

What is behind the high oil prices is a mixture of both bad infrastructure in developing countries' refineries and some greed. Countries like Russia and Venezuela as well as some Middle Eastern countries have failed to invest adequately in their oil sectors. This means that extraction costs are higher than normal. Also, some countries might be tempted to keep the prices high because it has been a long time that cash was so easy to come by. Perhaps if the battle with US consumers is easily won, there will be an increased willingness by the rest of the global community to believe that it simply has to adapt to higher oil prices. However, not everyone around the globe drives energy intensive SUVs. Economists calculate that it would be fair for SUV drivers to pay over USD4 dollars per gallon of petrol at the pump. U.S. Treasury Secretary John Snow was quoted as saying that the G7 is preparing for an era of more costly energy and that all countries involved can handle recent increases that have pushed prices over USD 58 a barrel.

Goldman Sachs says in its report published at the beginning of this month that there is a possibility of an oil price superspike to a level as high as USD105 per barrel. Even though the report is not at all inspiring great worries, the mere mentioning of skyrocketing price jump scenarios had made the markets scared ahead of the meeting. Last Friday the Dow Jones industrial average slid down 191.24 points to end at 10,087.51.

Analysts also worry that projects in Venezuela might be constrained due to the government's proposals to impose a more stringent tax regime. This might put Venezuelan companies under stress in meeting their targets of pushing output to 5 million bpd by 2009. The country's output is already lower than official figures indicate.

Venezuela is the world's fifth largest oil exporter and officials say it produces 3 million barrels of crude a day. But analysts say that production is closer to 2.6 million.