Oil shocks are bad news
Anatole Kaletsky noted in The Times the other day that there have been five oil shocks since 1973, and all five were followed by global recessions. Defining exactly what level constitutes an oil 'shock' isn't easy. Various analysts will offer various rules of thumb, and I think you could still debate whether or not the current surge is a definite recession inducer.
But it probably is fair to say that if we stay at these levels for very much longer, or prices go much higher from here, we're looking at a grim situation, particularly for fragile developed world economies. So what can we do?
Kaletsky's solution to the problem was to suggest that we twist the arms of Saudi Arabia's leaders up their backs. If they don't flood the market with oil, we should make sure that they know there will be no safe haven for them in the West if they get kicked out by their own people.
This tactic strikes me as a tad impractical, not to mention a little impetuous. Autocrats tend to be quite stubborn in the face of threats. That's generally how they get to stay autocrats. And while there's a danger of an uprising in Saudi, it's certainly no sure thing. In short, I don't think we've got the leverage to be threatening the leaders of the world's biggest oil producer with anything.
Moreover, if the Saudis aren't unleashing quite as much oil as we'd perhaps like, there could be a more worrying reason for it. Fatih Birol of the International Energy Agency has described Saudi as the "central banker" of the oil world. The trouble is, unlike a central bank, the Saudis can't just press a button and magic oil out of nowhere.
Rumours have swirled about Saudi reserves for decades. A belief that they – along with the rest of oil cartel Opec – don't have as much oil as they claim to have, is a key factor in the 'Peak Oil' argument. So maybe pumping more just isn't an easy option.
Breaking our dependency on Middle East oil
Whatever the problem, there are two issues for the rest of us here. One is our continued dependence on oil itself. There doesn't seem to be a lot we can do to address that rapidly. Transport is the main thing we use oil for, and the day we're all driving electric vehicles, scooting cross-country on high-speed trains and going on holiday in Zeppelins, is a long way off.
But the second issue is perhaps more readily addressable. This is the problem of where our oil comes from. It's never been very comfortable to be so dependent on the Middle East. It's always been a volatile region. And as the West is now acutely aware, we've had to compromise our lofty principles quite severely in the name of energy security – doing deals with regimes we're now lobbying to have thrown out of power.
Could 'unconventional' reserves be the answer?
So here's an interesting fact that may have escaped your attention. US oil output in 2010 rose to its highest level since 2002. In fact, reports the FT, analysts believe that the US was "the largest contributor to the increase in global oil supplies last year over 2009 – and is on track to increase domestic production by 25% by the second half of the decade".
Of course, this isn't a solution. America would still depend on imported oil, "which accounted for roughly half of US demand in 2010". But producing more domestically would certainly reduce the vulnerability to supply shocks.
So where did all this extra oil come from? The answer is 'unconventional' reserves. We've been writing about the natural gas 'revolution' for a while now. In short, breakthrough technology has made it far easier and cheaper to get natural gas out of 'gas shale'.
Less widely reported is the fact that the same technology has made it possible to get oil out of 'oil shale' as well. Various techniques, such as 'fracking' which involves using high pressure water to crack the rocks and release the oil, have slashed the cost of production. Of course, it's still a lot more costly than producing oil in Saudi Arabia. But you don't have the political risk, and with the oil price at its current level, you can spend a fair bit on production before it becomes uneconomical.
It's not a complete solution to our dependence on the Middle East by any means. But these sorts of problems are solved incrementally, not by magic bullets. I remember one of the first times I wrote on this topic for MoneyWeek, about five years ago, oil shale was right on the fringes of 'alternative' oil. It was simply far too expensive. Pundits said it could be decades before it was viable. Well, now we're using it.
Anatole Kaletsky noted in The Times the other day that there have been five oil shocks since 1973, and all five were followed by global recessions. Defining exactly what level constitutes an oil 'shock' isn't easy. Various analysts will offer various rules of thumb, and I think you could still debate whether or not the current surge is a definite recession inducer.
But it probably is fair to say that if we stay at these levels for very much longer, or prices go much higher from here, we're looking at a grim situation, particularly for fragile developed world economies. So what can we do?
Kaletsky's solution to the problem was to suggest that we twist the arms of Saudi Arabia's leaders up their backs. If they don't flood the market with oil, we should make sure that they know there will be no safe haven for them in the West if they get kicked out by their own people.
This tactic strikes me as a tad impractical, not to mention a little impetuous. Autocrats tend to be quite stubborn in the face of threats. That's generally how they get to stay autocrats. And while there's a danger of an uprising in Saudi, it's certainly no sure thing. In short, I don't think we've got the leverage to be threatening the leaders of the world's biggest oil producer with anything.
Moreover, if the Saudis aren't unleashing quite as much oil as we'd perhaps like, there could be a more worrying reason for it. Fatih Birol of the International Energy Agency has described Saudi as the "central banker" of the oil world. The trouble is, unlike a central bank, the Saudis can't just press a button and magic oil out of nowhere.
Rumours have swirled about Saudi reserves for decades. A belief that they – along with the rest of oil cartel Opec – don't have as much oil as they claim to have, is a key factor in the 'Peak Oil' argument. So maybe pumping more just isn't an easy option.
Breaking our dependency on Middle East oil
Whatever the problem, there are two issues for the rest of us here. One is our continued dependence on oil itself. There doesn't seem to be a lot we can do to address that rapidly. Transport is the main thing we use oil for, and the day we're all driving electric vehicles, scooting cross-country on high-speed trains and going on holiday in Zeppelins, is a long way off.
But the second issue is perhaps more readily addressable. This is the problem of where our oil comes from. It's never been very comfortable to be so dependent on the Middle East. It's always been a volatile region. And as the West is now acutely aware, we've had to compromise our lofty principles quite severely in the name of energy security – doing deals with regimes we're now lobbying to have thrown out of power.
Could 'unconventional' reserves be the answer?
So here's an interesting fact that may have escaped your attention. US oil output in 2010 rose to its highest level since 2002. In fact, reports the FT, analysts believe that the US was "the largest contributor to the increase in global oil supplies last year over 2009 – and is on track to increase domestic production by 25% by the second half of the decade".
Of course, this isn't a solution. America would still depend on imported oil, "which accounted for roughly half of US demand in 2010". But producing more domestically would certainly reduce the vulnerability to supply shocks.
So where did all this extra oil come from? The answer is 'unconventional' reserves. We've been writing about the natural gas 'revolution' for a while now. In short, breakthrough technology has made it far easier and cheaper to get natural gas out of 'gas shale'.
Less widely reported is the fact that the same technology has made it possible to get oil out of 'oil shale' as well. Various techniques, such as 'fracking' which involves using high pressure water to crack the rocks and release the oil, have slashed the cost of production. Of course, it's still a lot more costly than producing oil in Saudi Arabia. But you don't have the political risk, and with the oil price at its current level, you can spend a fair bit on production before it becomes uneconomical.
It's not a complete solution to our dependence on the Middle East by any means. But these sorts of problems are solved incrementally, not by magic bullets. I remember one of the first times I wrote on this topic for MoneyWeek, about five years ago, oil shale was right on the fringes of 'alternative' oil. It was simply far too expensive. Pundits said it could be decades before it was viable. Well, now we're using it.
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