Pump panic highlights Western slavery to crude oil
The UK remains locked in the grip of petrol panic. Just the prospect of a tanker drivers’ strike, with the Easter holiday season looming, and we lost our collective nerve. Snaking petrol station tail-backs became commonplace and jerry can sales soared. On Friday, a third of UK filling stations actually ran out of petrol, with demand up 170pc on the same day the week before.
Some say the Tories deliberately stoked the petrol panic, to get rows over cash-for-access Downing Street dinners and post-budget “granny-tax” squirming off the nation’s front-pages. Ministers will certainly have known that a potential fuel crisis piles serious pressure on Labour, given the party’s financial reliance on Unite, the union representing the 2,000 fuel tanker drivers threatening to strike. Fearing public opprobrium, perhaps, Unite late on Friday ruled out industrial action over the upcoming Easter weekend. Yet, still, the panic buying continued.
Does anything better demonstrate our overwhelming addiction to oil? Commercially, logistically, culturally and even psychologically, the world’s “advanced countries” can’t do without crude. The UK’s latest petrol spasm, even if now in abeyance, points to a stark bigger picture. For even if the euro-crisis has been contained for now (and that’s a big “if”), concerns are mounting that it’s a spiraling oil price, rather than European monetary meltdown, that could slam the world economy back into the doldrums.
The threatened UK fuel strike is a “downstream” issue. The danger is that striking tanker drivers refuse to transfer existing petrol from our refineries to the tanks under station forecourts. Even the threat of that – the final-stage delivery of fuel we already have – is enough to spark political chaos, while goading otherwise rational people into getting up at 3am to buy petrol.
But such “little local difficulties” are as nothing compared to the “upstream” issues that loom. It is on global energy markets, where physical crude is bought and sold in the billions of barrels, that our attention should be focused. The fuel scare we’ve seen in UK villages, towns and cities over the last week is just a microcosm of a worldwide energy struggle.
Last year, the world economy was sluggish, with global GDP growth of 3.8pc, down from 5.2pc the year before. Yet such is the strength of demand from populous, fast-growing emerging markets that total oil use still surged in 2011, pushing the average crude price to $111. That was the highest annual average price in history and over 40pc up on the year before.
The underlying reason why oil prices are so firm, as this column has often said, is that global crude demand is rising relentlessly, while the most important oil wells on earth are depleting. Back in 2001, the world consumed 76.6m barrels of oil a day. Last year, just a decade on, global oil use was a hefty 89.1m barrels daily, some 16pc higher.
On the supply side, meanwhile, while attention focuses on geopolitical flare-ups such as Iran, the enduring trends relate to geology and finance. Since the 1960s, the discovery rate and size of new oil and gas fields has fallen markedly. More than four-fifths of the world’s major fields are beyond peak production. The output of the world’s largest 580 oil fields is declining at a 5.1pc annual average. The credit-crunch, meanwhile, severely cut investment in exploration and well development, so squeezing long-run supply.
This much is increasingly well known. Talk of long-term oil supply depletion, until recently the preserve of conspiracy theorists and cranks, now dominates mainstream discourse. In recent weeks, though, with oil prices up 15pc this year, and the economic fall-out becoming apparent, efforts to put a ceiling on the oil price have become much more intense.
As the US election season comes into view, the Presidential vote just 7 months away, the politically deadly “four bucks a gallon” is now in the offing. Republicans are castigating Obama for the six-month moratorium he imposed, after the 2010 BP spill, on deepwater drilling in the Gulf of Mexico.
The White House has responded by proposing, once again to tap America’s “Strategic Petroleum Reserve”. The President states that US oil output is at its highest for eight years, and import volumes have fallen to below half of consumption for the first time in a decade. Obama-friendly commentators, some of them displaying little previous knowledge of world commodity markets, have also been wheeled-out to claim that America, “within the next decade”, could become energy independent.
As part of the same exercise, Saudi Arabia – the world’s swing-producer, with 25pc of global reserves – has been prevailed upon to try to douse crude prices. Last week, the Saudi cabinet, issued a statement noting that the Desert Kingdom will “work individually and with others if necessary” to “return oil prices to fair levels”. When the market barely moved, veteran Saudi Oil Minister Ali Naimi followed-up with a sharply-worded newspaper article stating that “there is no lack of supply, there is no demand which cannot be met”.
The notion that the US could be energy independent any time soon is ludicrous. America produced 7.5m barrels of oil a day in 2010, but used 19.2m. So the States, with just 4.5pc of the world’s population, accounted for 22pc of global oil demand.
That kind of consumption pattern costs a lot more to sustain when prices are high. During the decade to 2010, the bill for America’s net oil imports amounted to 1.7pc of GDP. This year, even the International Energy Agency, the Western world’s energy think-tank, predicts that US oil imports will cost 2.7pc of the country’s national income.
While the European Union’s net crude import deficit could be even higher, at 2.8pc of GDP in 2012, Europe is less energy dependent overall. Research by Societe General suggests that America’s total 2012 oil bill, for crude produced at home and abroad, will be 5.4pc of GDP, about twice that of Europe. While this number was higher during the 1970s oil price shocks, at around 7-8pc of national income, the big Western oil-importing economies, not least the US, remain extremely vulnerable to the rising price of crude.
It cannot be taken for granted, also, that Saudi is able, or would even want, to ride to the Western world’s rescue – whatever Naimi says. The West has long pushed Riyadh to pump oil at rates which are fundamentally unsustainable. Social unrest, and the related rise in welfare spending, means the Saudi government’s budget now balances at well over $100 a barrel. And the Kingdom knows, also, that even if the Western world slumps, then China, its economy set to grow by more than 8pc this year, remains a ready market for Arab crude.
At the same time, the idea of US “energy-independence” – the second of last week’s oil market sedatives – relies very heavily indeed on sharply rising production from shale rock, extracted with the use of hydraulic fracturing. The more I learn about “fracking” the more concerned I get. Its impact on local water supplies, and the damage done to underground aquifers, could become one of the biggest scandals in American history. Erin Brokovich on speed. There are all kinds of reasons why America wants to believe in energy independence. But I’m afraid I just don’t buy it.
Not unless, that is, like the rest of the Western world, the US takes very drastic steps indeed to use less crude. Local political events in both America and the UK suggests we’re a very long way from that.
Liam Halligan is Chief Economist at Prosperity Capital Management