Dirt-Cheap Gas in 2009: Be Careful What You Wish For

By Michael T. Klare, Tomdispatch.com. Posted January 14, 2009.

Needless to say, these declines were unexpected. Believing that international demand would continue to grow -- as had been the case in almost every year since the last big recession of 1980 -- the global oil industry steadily added to production capacity and was gearing up for more of the same in 2009 and beyond. Indeed, under intense pressure from the Bush administration, the Saudis had indicated last June that they would gradually add to their capacity until they reached an extra 2.5 million barrels per day.

Today, the industry is burdened with excess output and insufficient demand -- a surefire recipe for plunging oil prices. Even the December 17 decision by members of the Organization of the Petroleum Exporting Countries (OPEC) to reduce their collective output by 2.2 million barrels per day has failed to lead to a significant increase in prices. (Saudi Arabia's King Abdullah said recently that he considers $75 a barrel a "fair price" for oil.)

How long will the imbalance between demand and supply last? Until the middle of 2009, if not the end of the year, most analysts believe. Others suspect that a true global recovery will not even get under way until 2010, or later. It all depends on how deep and prolonged you expect the recession -- or any coming depression -- to be.

A critical factor will be China's ability to absorb oil. After all, between 2002 and 2007, that country accounted for 35 percent of the total increase in world oil consumption -- and, according to the DoE, it is expected to claim at least another 24 percent of any global increase in the coming decade. The upsurge in Chinese consumption, combined with unremitting demand from older industrialized nations and significant price speculation on oil futures, largely explained the astronomical way prices were driven up until last summer. But with the Chinese economy visibly faltering, such projections no longer seem valid. Many analysts now predict that a sharp drop-off in Chinese demand will only accelerate the downward journey of global energy prices. Under these conditions, an early price turnaround appears increasingly unlikely.

2. When Prices Do Rise Again, They Will Rise Sharply: At present, the world enjoys the (relatively) unfamiliar prospect of a global oil-production surplus, but there's a problematic aspect to this. As long as prices remain low, oil companies have no incentive to invest in costly new production ventures, which means no new capacity is being added to global inventories, while available capacity continues to be drained. Simply put, what this means is that, when demand begins to surge again, global output is likely to prove inadequate. As Ed Crooks of the Financial Times has suggested, "The plunging oil price is like a dangerously addictive painkiller: short-term relief is being provided at a cost of serious long-term harm."

Signs of a slowdown in oil-output investment are already multiplying fast. Saudi Arabia, for example, has announced delays in four major energy projects in what appears to be a broad retreat from its promise to increase future output. Among the projects being delayed are a $1.2 billion venture to restart the historic Damman oil field, development of the 900,000 barrel per day Manifa oil field and construction of new refineries at Yanbu and Jubail. In each case, the delays are being attributed to reduced international demand. "We are going back to our partners and discussing with them the new economic circumstances," explained Kaled al-Buraik, an official of Saudi Aramco.

In addition, most "easy oil" reservoirs have now been exhausted, which means that virtually all remaining global reserves are going to be of the "tough oil" variety. These require extraction technology far too costly to be profitable at a moment when the per barrel price remains under $50. Principal among these are exploitation of the tar sands of Canada and of deep offshore fields in the Gulf of Mexico, the Gulf of Guinea and waters off Brazil. While such potential reserves undoubtedly harbor significant supplies of petroleum, they won't return a profit until the price of oil reaches $80 or more per barrel -- nearly twice what it is fetching today. Under these circumstances, it is hardly surprising that the oil majors are canceling or postponing plans for new projects in Canada and these offshore locations.

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