Commentary, 5/6 2006

Published May 31, 2006
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Supply Versus Demand

While we at the magazine were visiting Houston for this year’s Offshore Technology Conference (OTC), much of the buzz – both inside and outside the Reliant Center – was about the price of oil, especially the prices at the pump.

The greater Houston area has a population that rivals Scandinavia as a whole, so what impressed us in general was the number of people in we saw, and specifically the number of automobiles on the road as well as the distances that many must travel. This is not part of our everyday lives here, and it led us to think a bit about oil prices in terms of supply and demand.

To be fair, driving habits in the US have evolved over nearly a century. But we can hope that one evolutionary path will be more drivers thinking beyond miles-per-gallon to miles-per-gallon-per-person, by increasing the number of passengers per trip. That alone could go a long way to easing the fuel woes of the world’s largest energy consumer.

Many reasons have been given for the upward trend in oil prices, and political and social turmoil certainly get the most headlines, but the simple economic law of supply and demand plays a big part as well. It’s true that political and social unrest as well as natural disasters pose a threat to supplies, yet demand is an ever increasing factor and the industry must continuously move more quickly just to maintain the current balance.

The fact is that we now have a precarious balance indeed. Oil and gas consumption roughly equals production, so it’s little wonder that threats to supplies play havoc with prices. It could be said that we have moved past “supply and demand” and have entered an era of “supply versus demand”. As the balance tips and we firmly move into a seller’s market, we may begin more examples of heavy-handed behaviour by both consumers and producers.

The US continues to use oil and gas at a tremendous rate and China has become the world’s second biggest oil importer (recently edging out Japan). Russia’s reserves mean that the country’s coffers are filling with petro-dollars, just as we’ve seen in the Middle East over the last 60 years. So, for some, the lines between the consumers and producers have been more and more clearly drawn.

Many feel that the war in Iraq was motivated by oil. In a recent Russian-European Union summit, Russian President Vladimir Putin said, “We see how the United States defends its interests, we see what methods and means they use for this,” which was the second time in a week that he had criticised the US. In particular, Putin’s remarks came in the wake of US Vice-President Dick Cheney’s recent assertion that Russia uses its energy resources as “tools of intimidation and blackmail” when it comes to its relations with its neighbours.

And this is only the most recent exchange between the world’s biggest consumer and one of the world’s biggest producers. When is comes to energy, the atmosphere has decidedly become tense.
Eventually, we hope to see energy sources shift away from oil and gas (they’re really too valuable to burn), but for now our reliance on oil and gas means that our options fall under two headings: use less and produce more.

When it comes to producing more, developing new technology for Improved Oil Recovery (IOR) – another hot topic at OTC – is an industry focal point. The authorities and governments must do their share to encourage sensible energy use in the public sector as well as to support and encourage such industry efforts to boost production.

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