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The oil apocalypse
By ANDREW CLARK Sunday 22 October 2000
Where have all the flowers gone? was a theme song of the kinder, gentler '60s, sung by the folk group Peter, Paul and Mary. "Where have all the barrels gone?" is the current version, blurted out by terminal jockeys in dealing rooms as the new millennium oil squeeze threatens the longest economic boom in history.
There are plenty of voices saying current oil shortages are just a blip in the global economy, one that will soon disappear. But there are also less rosy scenarios in which these shortages worsen over the northern winter. This would trigger a '70s reprise: panic buying, petrol-station queues and possibly even rationing of essential heating oil in North America and Europe.
Last week American crude-oil inventory stocks fell by a further 3.1 million barrels to just over 280 million, the second slide in as many weeks. As the globe's daily oil consumption is around 75 million barrels, this may seem, at first blush, a proverbial drop in the oil ocean.
But the recent tightness in the oil market is making the world skittish and is partly responsible for triggering a wild ride in share and currency markets.
There was a foretaste of chaos in Europe in the past few weeks. Truck drivers blockaded refineries, highways and ports in Britain, Germany, France, Belgium, Spain, Ireland, Poland and Holland. The impetus for these blockades, which almost paralysed British industry, comes from the enormous tax imposts on fuel in Europe. These range from more than three-quarters of the end price in the United Kingdom down to nearly 60 per cent in Ireland.
Australia is not immune. In net terms we produce about 85 per cent of our needs, according to Barry Jones, executive director of the Australian Petroleum, Production and Exploration Association.
But only 40 per cent of Australia's petroleum consumption is sourced from local oil deposits. This is because much of our oil, particularly the product of the North-West Shelf, off the Western Australian coastline, is shipped to Singapore and other centres for refining.
According to Mr Jones, there is no risk of oil shortages in Australia over the next two to three years. However, by 2010 local production could be less than a quarter of the current 420,000 barrels a day, while demand increases "significantly". Short term, the most significant local impact will be the immediate flow-on effect of damage to the global economy.
But even without the aid of endless bar charts and graphs, the outlook is confused. On the face of it, there's enough oil to go round, but the daily market reality, featuring a spiralling price, tells us otherwise. As Peter Gignoux, head of the energy desk at Salomon Smith Barney in New York, recently put it: "Where are the barrels?"
According to Mr Jones, current shortages are due to OPEC's production cutbacks - despite its many protestations to the contrary - and a significant reduction in oil refining capacity in North America.
The net result is that since the beginning of last year oil prices have nearly quarupled from around $US10 a barrel to about $US35. In percentage terms this is uncannily similar to the price leap OPEC announced in the middle of the Yom Kippur war in October 1973.
Then the hardly known Organisation of Petroleum Exporting Countries, an oil producers' cartel formed in 1960, became the number-one United States bogeyman by also announcing an OPEC oil boycott of America.
An OPEC shadow hovered over global economic developments for the rest of the decade. Inflation, petrol shortages, photos of cars queueing outside service stations, and endless speculation about a new OPEC-induced price gouge, became almost routine headline grabbers. Regular OPEC meetings in Vienna attracted enormous media coverage.
Petropolitics became the new buzzword; Sheik Yamani, the Saudi Arabian oil minister, emerged as one of the most influential figures on the world stage. In 1979, supporters of the Ayatollah Khomeni toppled the Shah of Iran, who had been installed on the Peacock throne after a CIA-engineered coup in 1953. OPEC took advantage of the turmoil to once again double oil prices.
After six years of global economic turmoil - of rising inflation and unemployment - OPEC's latest move became the signal for the US authorities to get serious about slaying the inflation dragon. A meeting of the Open Market Committee of the US Federal Reserve Board, presided over by then Fed-head Paul Volker, agreed to shrink inflation out of the system. The Fed squeezed the money supply and held its nerve until inflation dropped dramatically nearly three years later.
And when interest rates finally plunged, an 18-year bull run on the US stockmarket - interrupted by dramatic plunges like Black Monday in October 1987 - fuelled a global equities bonanza. But now the '70s cycle of inflation and recession - or so-called stagflation - seems to be menacing again. At this stage the threat is not strong, and nations and international bureaucrats are far more sophisticated in handling such problems.
The head of the US Federal Reserve, Alan Greenspan, again pointed out a few days ago that oil plays a smaller role in the global economy than it did a generation ago.
But a rapid oil-price escalation still has a '70s-style short-term impact. It means companies, industries and national economies have little time to adjust. The rapid price difference acts as an indiscriminate new tax. In the short term, it can't be passed on.
Prices have remained well above the $US30 a barrel level that the US administration has said it considers dangerously high. And this is despite President Bill Clinton's order last month to release 30 million barrels from the American Strategic Petroleum Reserve over 30 days in an attempt to calm markets.
The response in the US to the latest oil squeeze has been mixed. According a to a recent poll taken by the authoritative Christian Science Monitor newspaper, almost two-thirds of Americans say they would be willing to drive a more fuel-efficient vehicle to conserve energy. At the same time, many also support drilling in Alaskan wildlife parks, which have so far been sacrosanct.
The target is the so-called Toorak tractors - four-wheel-drive gas guzzlers that in Melbourne seem to spend most of their time negotiating the hazardous terrain of thoroughfares like Toorak Road and Orrong Road, ferrying children to and from private schools.
The Christian Science Monitor poll suggests that most Americans feel that with petrol prices rising, the government should force car makers to boost the fuel efficiency of the "wildly popular" vehicles. The same issue could resurface in next year's federal election campaign here.
Meanwhile, Daniel Yergin, chairman of Cambridge Energy Research Associates, and co-author of World Oil Scenarios to 2020 , warns that until additional supplies arrive, the market is vulnerable to disruption. "Some combination of events - spreading Middle Eastern violence, Iraqi machinations, labor unrest in the Venezuelan oil industry, a logistical bottleneck in the oil transport system, sheer cold weather - could disrupt the supply system, or turn the high anxiety in the world oil market into something more like a panic and send prices over $US40 a barrel, at least for a short time."
However, "what we're facing, at least so far, is not a crisis. It's a price shock, part of a particularly extreme cycle. It will probably pass".
Let's hope so.
-- Carl Jenkins (Somewherepress@aol.com), October 21, 2000