The Oil Industry

The oil industry shot into the limelight with crude oil prices crossing the US$60 a barrel in July, 2005. Morgan Stanley, the US investment bank, even raised its forecast of crude oil prices for 2005 and 2006 from US$43/bbl to US$50/bbl.

Cambridge Energy Research Associates, an energy consulting firm for the oil industry, says that fears of the world running out of oil are unfounded. According to CERA, crude oil prices will come off highs towards the end of this decade with supply overtaking demand by about 7.5 million barrels per day.

Currently in the oil industry, oil prices are ruling high because of several reasons. With global economy staging a recovery in the past few years, demand for oil from China and India particularly has shot up. Other factors contributing to high prices in the oil industry include the reduction of inventories, political uncertainty in the Middle East, speculation and inadequate refinery capacity. Some also blame the Organization of Petroleum Exporting Countries for not doing enough to rein in prices. Though OPEC has been proactively managing prices through production cuts, its influence on the oil industry has waned of late due to an upsurge in demand and lack of spare capacity.

In the past, low prices discouraged the oil industry from investing in oil exploration. The global oil industry is dominated by state-owned oil companies such as Saudi Aramco and private sector oil companies such as BP, ExxonMobil and Royal Dutch Shell. Earlier, the oil industry focused more on optimising oil production and less on finding new reserves. With oil fields in areas such as the North Sea aging, the oil industry needs to find new sources. The oil industry, having exploited the easily-accessible reserves, now finds itself in an unenviable position of having to look for oil in hostile deep seas. Fortunately, oil prices are high and technology makes deep sea oil exploration and production possible.

Concerns in the oil industry

Already most countries are bracing for high oil prices and shortages in the oil industry. Besides building strategic petroleum reserves, countries are vying with each other for known oil and gas reserves outside the Arab world. In the USA, for example, support for a controversial proposal to drilling oil wells in Arctic National Wildlife Refuge in Alaska is increasing. This wildlife reserve is sixty miles away from Prudhoe Bay, one of the biggest reservoirs in the world. According to US Geological Survey, the reserve could contain ten billion barrels of oil.

The growing importance of energy security in the oil industry is best illustrated by the audacious bid of China National Offshore Oil Company, a state-owned entity, for Unocal. CNOOC’s bid came at a time when Chevron, another energy giant, was close to taking over Unocal. The CNOOC’s bid has generated a lot of debate in the USA. Though China is an important trade partner of the USA, most Americans harbour misgivings about its growing economic power. Indeed worldwide in the oil industry, countries are scrambling to develop domestic energy reserves and gain control of foreign reserves.

The rush to gain control of energy reserves by the oil industry is partially driven by political uncertainty in the Middle East. The world oil reserves of the oil industry are concentrated in Middle Eastern countries such as:

• Saudi Arabia,
• Iran,
• Kuwait,
• Iraq
• United Arab Emirates.

Oil industry alternatives

The alternatives to oil, however, suffer from technical, political, environmental and commercial drawbacks. Some governments are focusing on natural gas, but with Qatar, Iran and Russia possessing a majority of reserves, geopolitical uncertainty creeps into the picture. Coal is another alternative, but environmental pollution works to its disadvantage. Renewable energy sources such as solar power and wind energy are not as reliable as conventional sources. Hydel and nuclear power hold out promise, but both sources suffer from some shortcoming. While CERA’s forecast of the oil industry does provide solace, countries could gain some respite from high oil prices by focusing on energy conservation and renewable energy.