When
a 2005 Goldman Sachs report talked about the possibility of a ''super-spike'' period
for oil prices, with the possibility of prices surging as high as $105 to a barrel,
many dismissed it as alarmist and self-serving. After all, Goldman was and continues
to be one of the most active traders in energy futures. However, the report did
end up pushing up oil prices and may even have helped Goldman''s energy trading
desk to report even higher profits; not that it was doing badly before the report.
The report triggered
a wave of new analysis and commentaries on the oil markets, most of which harped
on the ''peak oil'' them and some even talked of $200 per barrel oil. The wave of
new theories and predictions ebbed when oil prices corrected subsequently, and
the entire episode was often cited as another example of how markets get unduly
excited. $100
oil will soon be a reality and that too much earlier than the Goldman report had
predicted. Prices have jumped more than 50 per cent so far this calendar year,
nearly 20 per cent of which has been over the last one month alone. After adjusting
for inflation, prices are now at historic highs - even above the levels seen during
the ''70s oil crisis, which many said would not happen for another century. So,
should we now start fretting about this once unimaginable price for a commodity
that has some influence on the lives of the entire population of the planet, and
even those yet to be born? Not
necessarily. On the contrary, it may not be a bad idea to wish for a prolonged
period of $100 oil - for our own prosperity as well as that of future generations.
Outrageous as it may sound at the outset, there are solid reasons why we should.
And, no, preventing global warming need not always be the primary reason. Trust
Al Gore to find a solution to that, with some help from Dr Pachauri and the rest
of the green brigade. It
is non-renewable, let us pay the price We can debate endlessly whether
global oil output is yet to peak, at the peak or even well past its peak. Theories
about ''peak oil'' are many and assumptions underlying each of them cannot be more
diverse. But one thing is certain; one-day the world will run out of it. No question
about that. And it won''t really matter whether it happens in a few decades or
several centuries down the line if the world has a reliable alternative in place
by the time oil wells run dry. It
is an equally undeniable fact that the quest for fuel alternatives will continue
in right earnest only if the cost of the current oil resource really pinch. High
oil prices will encourage even more investment flows into research for alternative
energy sources. All alternate energy sources that are now considered promising
are prohibitively expensive, unless they are subsidised heavily. Technologies
to produce and distribute energy from alternate sources have to mature and become
a lot more efficient before they can be considered really viable. That needs more
R&D investments and only high oil prices will ensure that. It
may be true that non-conventional hydrocarbon reserves like shale sand deposits
in Venezuela and Canada hold more oil than the entire Middle East and Russia.
But extraction of oil from such sources is very costly and can compete as a commercial
fuel either if their prices cam, somehow, be brought down, or they become cheaper
in comparison to oil prices. Eventually, they will also be exhausted as global
energy demand can only increase. At best, they can extend the grace period until
the world runs out of hydrocarbon reserves and starts relying on other sources. Encourage
better energy efficiency Most of us need to be really pushed before
we change our bad habits. We need high oil prices to force us to become more efficient
in our use of energy. American vehicle owners are already dumping their monstrous,
petrol-guzzling SUV''s for more fuel-efficient smaller vehicles as fuel prices
have begun to hurt. It is estimated that if vehicles in the US are as fuel efficient
as those in Europe, aggregate American oil consumption would fall by as much as
3 million barrels a day - or nearly 4 per cent of world''s current daily oil demand! There
is no doubt that, like combustion engines in automobiles, other technologies and
processes can be improved to achieve better energy efficiency. The International
Energy Agency (IEA) estimates that nearly a third of the world''s total energy
output is wasted, mostly in losses related to electricity generation and distribution.
The gains from even a modest improvement in efficiency will be quite substantial,
and more importantly, long lasting. The
world needs petrodollars If you are one of those who thought that
the Chinese have the biggest oil surpluses in the world, you need to think again.
Oil exporting countries in the Middle East and Central Asia will accumulate a
staggering $1.9 trillion between 2004 and 2008 from higher oil prices, says the
IMF. This is not total oil revenue, but the additional cash they generate through
higher prices. Now, imagine the kind of surpluses these countries will build if
high oil prices persist for the next two or three decades! How
are they going to spend all this cash? Most of it will go into building more for
themselves and the rest will be parked overseas. Either way, the world will benefit
from their cash. The
six members of the Gulf Cooperation Council, led by Saudi Arabia, have investment
plans of over $800 billion over the next five years. Entire cities in the region
have already been transformed into massive construction sites. Artificial islands
for the mega-rich, the world''s tallest skyscraper, one of the biggest airports
and so on are under construction; not to mention new roads and other infrastructure.
Not that the region really lacked infrastructure, now that it has too much cash,
it just decided to build everything new on a much, much grander scale. This
unprecedented building boom accounts for part of the bull run in commodities and
the huge demand for engineering and design services - ask L&T. The region
also remains a large provider of employment for migrant labour from neighbouring
countries like India. Nearly half of the around $25 billion that India receives
annually from its citizens working abroad comes from those in the Middle East.
Not content
with what they are building in their own backyards, some of these countries are
increasingly seeking greener pastures. Oil-rich countries in the Middle East have
also built up vast pools of capital, now widely defined as sovereign funds, to
be invested elsewhere. If you thought they are going to be passive investors,
like they were during the earlier oil booms, you couldn''t be more wrong. They
have already started gobbling up entire companies in an attempt to build global
corporations that can dominate their respective industries. Dubai
Ports is already one of the largest operators of seaports in the world, though
the US government could browbeat it into ceding control of some US ports it acquired.
Saudis are focussing on oil and petrochemicals, naturally, and have recently acquired
GE Plastics. Some of the Middle East airlines like Emirates and Qatar Airways
are already among the largest and fastest growing in the world. It is almost certain
that these companies will look at more overseas acquisition targets for growth.
This investment spree, like private equity funds, will support global equity valuations
and creation of investor wealth. Much
of this holds true for Russia as well. If oil prices had not boomed, the country
could have easily become a basket case and not one of the BRIC stars it is today.
Excluding record oil revenues, Russian GDP growth will be negligible. Thanks to
the boom, the country now has a chance to re-build its economy. Russian oil and
metal companies like Severstal Steel have already started eyeing overseas acquisitions.
There is some
merit in the argument that we will be better off if we keep the money to ourselves
rather than enrich a bunch of autocratic Middle East sheikhs and Czar Putin of
Russia. But concentration of wealth in the hands of a few has its own merits,
especially if they spend the money on grand projects and overseas investments
that will support employment and growth across the globe. Former
US treasury secretary Bob Rubin, who is now with Citigroup, is said to have advised
President Clinton, "don''t hurt the rich, they create all the jobs".
We may hate to admit it, but the fact is we need the rich more than we may pretend
we do. Even if enriching the Arabs and Russians is a bad idea, it may be worth
paying higher price for oil because of the other positive effects. If
oil prices decline, the petrodollar flows will obviously fall. To quote the IMF
again, every $10 per barrel drop in oil prices will lead to a loss of around $90-billion
in the revenues of oil exporters in the Middle East and Central Asia. That may
not be too much, but the trend reversal could make these countries more cautious
and they may hold back their spending. Help
Mukesh Ambani retain his world''s richest crown I am serious. Record oil
prices have helped Mukesh Ambani to perform feats that are unparalleled in the
history of market capitalism anywhere in the world - something we Indians should
be proud of. Like for instance, getting a $25 billion valuation for a company
- Reliance Petroleum - that is still in the process of building its refinery.
Its current valuation is nearly four times the total project cost! This is at
a time when most global refiners are reporting declining margins. Don''t be shocked
if you hear a market rumour that gold could be a by-product of oil refining, but
only from the Reliance refinery! Do
you think the huge stock price run-up in Reliance Industries would have been possible,
without the high prices it will get for its natural gas - starting next year?
The price agreed to recently by the government for Reliance''s gas is more than
double its earlier contract price for supply to NTPC. Even
Anil Ambani could not have dreamt of giving big brother hot competition in the
''world''s richest'' sweepstakes. One of his companies, RNRL, enjoys a market value
of $3.5 billion only on hopes of getting cheap natural gas from Mukesh Ambani''s
Reliance Industries. It is another matter that Mukesh may not part with the gas
so easily and so cheap. Reliance
Energy, the other Anil Ambani company which has seen a flare up in stock prices,
also owes its fortunes to oil prices which in turn drives prices of other forms
of energy. Investors are betting on sustained demand and high prices for energy.
Reliance Power, equally owned by Reliance Energy and Anil Ambani''s privately-held
investment companies, which is due to come out with an IPO would have struggled
to get its 4,000 MW Sasan mega power project going if it were not a pit-head project
with captive coal mines allocated by the government. Coal prices have gone up
substantially and having captive resources is invaluable What
is likely Even if $100 per barrel oil is desirable for many reasons,
it is unlikely that prices will stay above that level consistently over the next
couple of years. Most of the 50 per cent gain in crude oil prices this year is
driven by geopolitical concerns and increased trading interest in the commodity.
Part of this premium will be eroded if we are headed for more peaceful times.
But, there could be flare-ups driven by specific events that may see oil prices
way above $100 as well. If
there is a further slowdown in the US economy next year, as some expect, which
in turn pulls down growth in other parts of the world, oil prices are likely to
correct and settle around $80. Other major economies like Japan and the Eurozone
countries are showing signs of a slowdown while China may make more drastic efforts
to cool its economy after the 2008 Olympics. Of
course, that prediction of slightly cheaper oil is on the assumption that there
will be no disruption in oil supplies because of geopolitical developments.
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