The IEA expects global energy demand to rise 36 per cent between 2009 and 2035. Ken James / Bloomberg
The IEA expects global energy demand to rise 36 per cent between 2009 and 2035. Ken James / Bloomberg

A Roman scholar puts oil prices in perspective



A simple answer to the question which way will oil prices move may be summarised in two words: "high" and "rising".

The International Energy Agency (IAE) predicts global energy demand will grow 36 per cent between 2009 and 2035, with China, India and the Arab world notably increasing consumption.

China, alone, is expected to account for 25 to 40 per cent of the rise in global demand. Economic activity has also resumed in the EU's industrial heartland of Germany as well as the US.

As the world's population approaches 7 billion, supply is not keeping pace with demand for oil and its derivative products. Most of the biggest fields have already peaked and the rate of decline in oil production is accelerating. Experts also identified a chronic under-investment by oil-producing countries. Which way oil prices? High and up.

The flaw is that this views the world as a market, oil as a commodity, and the future as predictable. A sounder piece of advice comes from the Roman scholar Pliny the Elder, who stated that the only certainty is that nothing is certain.

Which way the oil price moves is intimately tied into globalisation. It features widening prosperity and deeper imbalances in economic development, a steep hierarchy in the distribution of wealth and power alongside a diffusion of global power structure, and an unparalleled networking of humanity thereby bringing people to live in an unprecedented intimacy, despite the inherited distances between religion, languages or cultures.

Globalisation is anything but a one-way street to prosperity and freedoms for all.

The market power of the few oil-producing countries that hold substantial reserves of oil - nations in the Middle East and North Africa (Mena) - is already high at about 40 per cent share of the oil market.

Alongside rational calculations of supply and demand, the human saga is driven by our collective inventiveness, passions and emotions. Emotions matter notably in regard to oil, where the world's growing dependence on one region inspires a "fear factor" that contributes as much as US$15 to $20 a barrel in price spikes.

Over-reliance of the world on the Mena region prompts fears of supply disruptions related to concerns about the prospect of a nuclear-armed Iran, the deep social changes afoot in the Arab world, or the precarious hold on power of some rulers. They are compounded by fears and interpreted as a grab for oil reserves with the Franco-British policy, with US backing, on enforcing UN Security Council Resolution 1973 over Libya's airspace.

The motive lies in the EU's espousal of the cause of human rights as the battleaxe that felled the communist party-states of Europe, leading to German unity and the collapse of Soviet power.

The EU would lose all credibility in the eyes of its own citizens if Libya's Muammar Qaddafi was allowed to crush his opponents.

The "Arab spring" is a European interest that opens the way to a wider peace arrangement across the whole region, to a more successful absorption of a European Islam, and a careful reduction of the American presence.

Meanwhile, the far-reaching suggestion by the Russian president Dmitry Medvedev's human rights council that the Soviet Union be declared a criminal state, and that all archives on its activities of the 20th century be opened to scholars, is momentous.

Since the diplomatic farce of Russia's invasion of Georgia impaired the vision of Russia reviving solely on the foreign exchange gained as a petro-state, Moscow has taken discreet steps to move Russia closer to the EU, while also continuing former president Boris Yeltsin's policy to co-operate with China over trade, technology transfer or the settlement of frontier disputes.

Russia joins with China in opposing the western powers' interpretation of the UN 2005 resolution certified the "right to intervene" in the internal affairs of other countries in the name of humanitarianism. But that is the sum of Russian-Chinese relations.

Russia fears China. In 1990, the Russian and Chinese economies were the same size, whereas now, China's is five times larger, and likely to be 10 times larger by the end of the coming decade. Russia's apprehension in being dragged into vassal status as a commodity provider to China's manufacturing platform and despite China's thirst for access to Siberian oil and gas, only 10 per cent of Russia's total exports go to China, compared with 80 per cent to Europe.

More than half of Russia's official foreign-exchange reserves are denominated in euros.

If the Russian presidency succeeds in officially declaring the Soviet state to be criminal, the impact on world affairs is difficult to over-estimate. The Soviet Union's existence was the decisive event of the past century.

A widely held prejudice in Europe and the US is that democratisation involves convergence on a liberal democratic model of free elections, the separation of powers, the rule of law and free speech. But democratisation is also compatible with theocracy, as in Iran.

The West flatters itself if its representatives mistake the form of westernisation for the substance of an updating of older traditions and passions.

What does this say about the direction of oil prices? Because emotions drive people, and people drive markets, oil prices may rise and they may fall.

Pliny the Elder has the last word.

Jonathan Story is emeritus professor of international political economy, Insead business school.

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