Stephen Corley, ITP - Business
...Despite the well-documented collapse in Arab stock markets - and the domino effect effect on spending - high liquidity from oil revenues looks likely to remain the region’s defining feature for years to come. Meanwhile, of course, the rest of the world is frantically assessing more short-term economic ramifications of price spikes.

Yet, although some may wail, oil prices are not breaking all-time records. Nor are they anomalies caused by headline-dominating geopolitical unrest: the violent conflict that continues to engage Israel and Lebanon has, in truth, almost no effects on oil prices, as it presents no genuine threat to supply. Current prices simply reflect another step in the longest upward march in the history of oil trading - indeed, a trend that has dovetailed with perhaps the central issue confronting a generation - as global demand increases for a finite precious resource.

...Several things flow from sustained higher oil prices. First, substitution becomes a much more attractive proposition.

The implications of the long-term bull market in oil are so far-reaching because it currently affects the cost of so much else - travel, heating, agriculture, trade and plastics, etc... But most experts recognise that the age of conventional oil will fade during the next century. Optimists rely on the fact that price and technology will allow for production of heavy oil, tar sands and shale oil, whose combined global reserves far exceed those of conventional oil.

The problem with these deposits is that their extraction involves one of the dirtiest processes known to mankind and any progress towards a less oil reliant economy will almost certainly need to consider environmental issues. However, coal liquefaction and gasification, improved gas-to-liquids technology and alternatives to oil, led initially by conventional and unconventional natural gas all offer additional potential. Hence the counter argument to the prevailing idea that we are locked in a death spiral of rising energy costs.

...The key question is whether we have reached what geologists term peak oil; output at the top of the production bell curve after which supply is always falling, together with higher costs of extraction. Regional analysts had to consider the realities of this during 2005 when the Burgan field, Kuwait’s biggest and the world’s second largest, passed its maximum production point.

The one thing the gloomiest geologist and the sunniest economist can agree on is that world’s oil demand is rising.

...So if we are at or about to enter peak oil, then global production can be expected to decline steadily at about 2-3% a year. Combined with the sort of heady demand we will continue to experience from the US to India and China, this can only lead to one thing, strong upward pressure on the spot price.

This is certainly good for the region. As a net recipient this year of around $300bn from oil within the GCC, with at least $50bn heading into the UAE alone, the Gulf can probably expect the foundations to be laid for some new airports, business parks, roads and new themed projects. Some observers warn, however, that an economic boom often involves over expansion and diversification, which is due less to business prowess and ability and more to do with egos.
(13 Aug 2006)

The real price of oil

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