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  Straits Times 19 Oct 07
High oil prices are here to stay
By Ng Weng Hoong

EARLY last month, when the bosses of ExxonMobil and Shell were railing against 'unjustifiable' US$70 (S$103) oil, the market sent US benchmark crude futures crashing through the US$80 barrier. As if to mock the doubters, oil has continued to set new records over the past few weeks. Today, it looks on course to break US$90, proving that the run-up was no fluke.

It was not the first time Big Oil has denied the market's growing strength - and shifting fundamentals. In recent years, as oil broke through key barriers, oil companies were quick to dismiss these as temporary glitches and aberrations, and that prices would soon settle back to 'normal' levels of US$20-US$30 a barrel as new supplies would soon cause a market glut. Yet, West Texas Intermediate crude has not been in the US$20s since 2003, and does not look like returning to those levels.

Still, oil companies and their supporters continue to ridicule the increases and the growing prospect of US$100 oil. The net effect of these denials will be to undermine the credibility of the industry and its supporters.

Last month was a tough one for ExxonMobil chief Rex Tillerson, as he told an industry gathering in Canada's oil-rich Alberta province that he could not explain the reason for US$70 oil. 'The fundamentals behind supply and demand do not support $70 oil. The fundamentals support something much less,' he said.

Soon after, the market saw US$80 oil for the first time, even though there was no breaking news of major supply disruptions. Ironically, the main headline was actually pro-supply, as Opec announced it would be raising its production.

Royal Dutch Shell CEO Jeroen van der Veer echoed Mr Tillerson's sentiments when he said he saw no fundamental reason for the surge since there was lots of supply to meet demand.

But there was more bad news for both executives. Besides being rebuked by US$80 oil, they must now contend with pro-oil Alberta catching a strain of the 'resource nationalism' fever sweeping Russia and Venezuela. These two are at the forefront of a new revolution of oil-rich countries seizing control of assets from international investors, sometimes with little regard for the sanctity of signed contracts.

After Mr Tillerson warned Albertans not to tamper with existing oil royalty rates, a provincial-government-appointed panel investigating the issue recommended precisely that. The panel, which included a former oil executive, shocked the industry with a landmark report calling for a sharp rise in royalty payments of nearly C$2 billion (S$3 billion) a year.

The world has changed. But veteran oil executives used to calling the shots do not seem prepared or willing to recognise the new reality.

With the era of cheap oil coming to a close, national oil companies are on the ascendant. Backed by their governments, these companies have shown how easy it is to reclaim resources or renegotiate contracts in their favour.

World oil demand continues to reach new highs each year, rising by around two million barrels per day each year - more than double Indonesia's total daily production. Combine that with the slow rate of new finds, the miserly sizes of recent discoveries and the long lead time and high cost of bringing the resources to market, and it is easy to see why oil prices are so well supported at current levels.

Amid this growing supply-demand imbalance, political and military conflicts have escalated in key producing countries such as Iraq and Nigeria, while Iran and Venezuela remain at odds with the West, dampening their collective ability to fully respond to higher prices.

ExxonMobil's fervent belief that high oil prices and new technology will stimulate supply will not be enough to cut prices. In an ideal world, market forces are allowed to work freely while human ingenuity will have room to explore and develop solutions to all problems. That would be the ideal world, and we are not in it.

Peak oil proponents are having a field day questioning the reliability of oil reserves data published by the largest producers such as Saudi Arabia and Kuwait, which refuse to open their books for independent verification.

The rapid decline of the US dollar offers yet another incentive for investors to pile into oil and other hard assets. With the dollar expected to fall further, China and India, for example, realise they are better off exchanging their large US dollar holdings for hard assets. Oil would be a top favourite. Even smaller Middle East oil companies are acquiring assets abroad.

Big Oil will have to acknowledge that high oil prices are here to stay if it is to remain credible and relevant in today's new supply-constrained environment.

Governments, the media and society must start heeding the new warnings and implications of the permanent reality of high oil prices.

Society needs to prepare for the transition from a current lifestyle and an economy that rely on an abundant supply of cheap oil. In Singapore, Tuas Power executives, promoting their green power programme last month, told me they expect electricity consumption to rise by 4-5 per cent annually over the next five years. This is too high and should be drastically cut if Singapore is to avoid a possible energy shock.

The threat to consuming nations of oil and gas supply cut-offs from producing countries is increasing. Singapore's plans for LNG imports, additional oil storage capacity and renewable energy investments cannot be developed in time to guarantee energy security. This means that countries like Singapore will need to start looking at ways to reduce consumption. Editor@EnergyAsia.com

The writer is editor of www.EnergyAsia.com, an energy news and analysis website operating since 1994.
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