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Sinking deeper into our addiction to oil

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Filling up at a fuel station©Dreamstime

In his State of the Union address in January 2006, President George W Bush warned of the dangers of being “addicted to oil, which is often imported from unstable parts of the world”. Ten years on, the world is showing how hard it is to break that habit.

The head of the International Energy Agency, Fatih Birol, pointed out last week that the share of the world’s oil supplies coming from the Middle East had risen to its highest since the 1970s, and was likely to continue to grow.

His comments were a salutary reminder of a weakness that is too easily forgotten at a time when crude is cheap: the world is still vulnerable to an oil supply shock.

Among the large consuming countries, the US has had the most success in reducing its reliance on imported oil. The policies promoted by Mr Bush, including mandates for biofuels and tighter vehicle fuel efficiency standards, had some effect, but the bigger factors have been the slow recovery from the recession of 2007-09, and the shale oil production boom of the past six years. Net petroleum imports dropped from 12.5m barrels a day in 2005 to 4.7m b/d last year.

That still leaves America as a significant importer though, and with US production falling and consumption rising, the decline in imports appears to have come to end for the time being.

Other developed countries have cut their oil consumption through higher efficiency and weaker growth, but remain largely import-dependent. Meanwhile the large emerging economies have become more thirsty for Middle Eastern oil. China’s oil consumption grew by 73 per cent during 2005-15, and the proportion covered by domestic production dropped from 53 per cent to 36 per cent. India’s oil consumption grew 60 per cent over the same period, and its own production dropped from 28 per cent to 21 per cent of that.

For oil importers, the upside of the price collapse of the past two years is that it has boosted their spending power. The downside is that consumers and businesses have been encouraged to make investment decisions that lock in demand. Sales of gas-guzzling SUVs have been booming in both the US and China.

The more the world becomes accustomed to the idea that oil prices will stay low, the worse the pain will be if they rise sharply. The volatility of the Middle East, and other producers such as Venezuela, means that a sudden disruption to supplies is always a risk.

If oil markets tighten because of steady growth in demand and erosion of inventories, then the US shale industry can be expected to respond with increased activity and production that will hold prices down.

But the US is not a “swing producer” in the sense that it can react within weeks to a supply shock. Deploying the capital, equipment and workers needed to raise US output will take time. As the 1970s showed, plenty of damage can be done by even a temporary spike in prices.

One answer for consuming countries is that they need to lean against the wind, using fuel taxes, efficiency standards and support for electric vehicles to discourage short-sighted responses to oil prices that may be only temporarily low. Subsidies for oil consumption should be cut wherever politics allow it.

There is only so much that those efforts can achieve, however. Oil consumers also need to recognise that they are tied in a codependent relationship with the Middle East and are likely to remain so for decades to come. With an addiction that is this difficult to kick, it is important to make sure it is carefully managed.

Copyright The Financial Times Limited 2016. You may share using our article tools.

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BDC 315 : Apr 2024