Friday, 13 May 2016

Is the oil age ending?

In the middle of April, the world’s leading oil producers planned to discuss the basement-level prices of fossil fuels, hoping to freeze production. The idea was that because the market is oversupplied and demand remains low, controlling how much oil is pumped would steady spot prices.

But it wasn’t to be. There was a draft agreement ready for signing at the Doha meeting, but at 3:00am on the morning of April 17 Saudi Arabia's Deputy Crown Prince Mohammed bin Salman called the Saudi delegation instructing them to scuttle the deal. This is the same 30-year-old prince who has implicit control of both the Saudi economy and military, and is struggling to handle each.

According to people close to the events, the prince’s decision to cancel Saudi was a geopolitical move to block an Iranian ambition to increase its own market share now that a nuclear deal has been reached and international sanctions ease. But it really shouldn’t take a handful of insiders to see that Saudi Arabia is exclusively obsessed with the Iran problem these days.

Yet last month’s oil drama, and the incredible collapse of prices over the past 18 months, is geopolitically significant for reasons far beyond the animosity of two Middle Eastern powers. Saudi Arabia and Iran are certainly using oil as a weapon, but if it wasn’t oil it would be something else. There is a fixed amount of real power in the region, and it abhors a vacuum – someone is going to have it, and it is not going to disappear.

So putting all that aside, the question behind every geopolitical planning in the second decade of the 21st century is: will oil prices remain low or rise again? Every country will be affected by the answer in different and individual ways. Net producers, such as Russia or Venezuela, will suffer if prices stay low. While net consumers such as Indonesia or Egypt will benefit.

But the assumption made a decade ago that “peak oil” would dictate ever-increasing prices as more people enter the middle class, each expecting their own carbon-based transport, is in many circles changing. They now say “peak oil demand” could instead become the reality as emerging economies slow their development and the green revolution offers viable alternatives.

Amongst the infinity of possibilities in the unknown future, this is surely one of the more probable outcomes. Yet in times of actual or perceived global chaos and disruption – as many people characterise the present day – analysts are prone to slipping into biases of tunnel vision, cultural blindness and unwarranted extrapolation from historical data. This column suspect such a thing could be occurring now.

Geopolitical tensions may be high, oil oversupplied and demand low, but the argument for future demand continues to be the best indicator of what’s coming. By 2030, the global middle class will more than double in size, from 2 billion to 4.9 billion. Brookings Institution confirms that demand slowdown in Europe and the US is indeed occurring because its middle classes will shrink from 50% of the global total to 22%.

Despite its current problems, Chinese middle class growth is expected to swell – it already overtook the US in total numbers in 2015. India, Indonesia, Vietnam, Thailand and Malaysia will also push Asia’s share of the new middle to more than double from its current 30%. By 2030, Asia will boast 64% of the global middle class and account for over 40% of its consumption. All of which will be new demand.

Assuming the trajectory of these middle classes follows a similar pattern to the experience of industrialised nations (so far, so good), and assuming the most efficient energy choice for transport remains fossil fuels (battery technology has a long way to go), then an eventual clawing back of oil prices isn’t so crazy.

The current downturn is probably a lag effect of the 2008 financial crisis finally affecting exporter countries, such as China and India. We may look back in a decade and see the 2010s as a deep breath before the plunge back into high commodity prices as demand eventually catches up with the emerging middle class reality.

Then again, this analysis could be wrong and the world truly has already made a fundamental shift in just a few years away from the most freeing fuel source ever to pull nations out of crippling poverty. But that seems unlikely. Most analysts would love to see the end of fossil fuels, but they may be reading into the data something which isn’t there. We will have to wait to find out.

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