The New York Times was recently bold enough to write “it is likely that the world has already entered a period of relatively predictable crude prices”. This statement might soon recall the American economist Irving Fisher, who wrote “Stock prices have reached what looks like a permanently high plateau” three days before the famous 1929 crash.
The newspaper based its claim on surprisingly stable prices over the past three years of geopolitical and economic upheaval, the emergence of new oil supplies – particularly US shale – and growing energy efficiency.
I would prefer to go with the great financier JP Morgan who, asked what the stock market would do, replied, “It will fluctuate”.
The illusory stability of oil prices over the past three years has been due to accidental factors. Oil producers enjoyed Goldilocks geopolitical upsets – crises hot enough to keep prices appetisingly high, not hot enough to exhaust the spare capacity of Saudi Arabia and its Arabian Gulf allies.
Ahmadinejad, Chávez, Qaddafi and Mend (the Movement for the Emancipation of the Niger Delta) were Saudi Arabia’s best friend. Even though two are dead, one out of office and one observing a shaky ceasefire with the Nigerian government, they continue to influence oil markets.
The former Iranian president Mahmoud Ahmadinejad’s confrontation with the West over his country’s nuclear programme took more than a million barrels per day off the market through sanctions. Venezuela’s production has never recovered from strikes and politicisation under the late president Hugo Chávez.
Muammar Qaddafi’s criminal misrule and violent overthrow virtually shut down Libya’s 1.6 million barrels per day, and after a swift initial recovery, it has been disrupted by protests and strikes since.
Though Mend’s guns are silent, a criminal web with Nigerian official collusion has spread across the Delta, tapping into pipelines and stealing perhaps 100,000 barrels per day.
Lesser producers in Yemen, Syria and South Sudan were also taken offline during the last three years by sabotage, civil war and pipeline disputes.
Against this backdrop, the global economic recovery was only tepid, while rampant US shale output repeatedly exceeded projections. The British think tank the Oxford Institute for Energy Studies has argued that, because oil prices have remained steady, North American shale production does not qualify as a “revolution”.
But clearly, as the institute acknowledges, without shale prices would have been much higher, and Saudi Arabia would have had to run to its maximum capacity of some 12.5 million barrels per day. It would have been nearly impossible for the US to impose and enforce such wide-ranging sanctions on Iran.
Another crisis at the same time – say, military action against Iran, political upheaval in Algeria or widespread violence in the south of Iraq – would have meant a global oil shock. But if political problems had been subdued, prices would have fallen and Saudi Arabia might have demanded cuts from its Opec colleagues.
Compare the last three years to the dramatic boom between 2003 and 2008. Then, as now, there were a series of disruptions to production, from Venezuela and Nigeria to Russia and Iraq – none huge in itself, but adding up. But unlike today, Chinese demand grew explosively while non-Opec production stagnated, leading inexorably to the record price of US$147 per barrel in July 2008.
During 1974-1978 and 1982-1985, after the last two great oil shocks, prices fluctuated in a band of no more than 20 per cent. But they were still unsustainably high – it just took time for unsustainability to become apparent. The core Opec countries can defend the current level for another year or two. But if there is no further major crisis, those “predictable” oil prices may become a steady slide.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing Carbon