Surging demand in developing countries and global fossil fuel supply constraints are creating volatility in energy markets and will keep prices up over the long term, BP’s Chief Economist Christof Rühl told EURACTIV in an interview.
Rühl spoke to EURACTIV on the margins of his presentation of BP’s 2008 Statistical Review of World Energy in Brussels yesterday (30 September).
The review had already been published in June, but BP chose to delay the presentation of the report so as to place it closer to discussion of the EU’s climate and energy package, according to Howard Chase, BP’s representative to the EU.
Global energy markets are heavily affected by a “massive shift” in the composition of global economic growth, Rühl told a small audience in Brussels. Non-OECD (Organisation for Economic Cooperation and Development) countries like China and India accounted for nearly 50% of growth and for nearly 90% of energy demand growth in 2007. China alone was responsible for 40% of that demand, much of it met by coal, Rühl said.
Soaring demand has put oil markets in a tight spot, with spare capacity in 2007 down to only two million barrels per day. The global oil market was estimated at around 86 million barrels per day in 2007, according to US Department of Energy figures.
Small disruptions in supply can therefore cause “violent reactions” in terms of price movements, he said.
BP argues that a greater nationalisation of oil resources and a resurgent Organisation of Petroleum Exporting Countries (OPEC) are preventing private oil companies from maximising oil production in order to benefit from high prices.
“Oil companies will try to maximise output to maximise profits when oil prices are high, and they will do so in competition with each other even at their own long-term detriment, meaning even if they create excess capacity and economic cycles,” Rühl explained.
Governments are different “in that they will try to maximise the long-term revenues from their rent. You will hardly ever see governments engaging in price competition with each other,” he said.
This situation largely explains the tightness of the market and its slow response to demand increases, according to Rühl, who is convinced that both the upward and downward shifts in oil prices over the last 18 months can be traced to OPEC production cuts and increases.
But while supply increases by OPEC will bring prices down, a barrel of crude is unlikely to trade for much less than $100 in the longer term, he said.
BP’s chief economist vehemently countered the idea that the world was facing a physical shortage of oil as proposed by ‘peak oil‘ theorists. “I have no reason to accept [peak oil] as a valid statement either on theoretical, scientific or ideological grounds,” he said.
“There is no resource constraint at the moment for oil. There is enough oil if you’re willing to accept the costs – including the environmental costs for sources like tar sands,” he added.
Russia’s energy ‘curse’
In response to questions about the impact of a resurgent Russia on global energy markets, Rühl expressed concerns that the former ‘heart’ of the Soviet Union was having difficulty coping with the ‘curse’ of fossil fuel reserves in the context of massive social and political upheaval.
“It’s a very thin line to walk between what many analysts call the oil curse or the energy curse, and turning these resources in the ground into gainful employment above ground,” explained Rühl, who was the World Bank’s chief economist in Russia before joining BP in 2005.