Text for Discussion:
Petroleum Prices: The Third Shock?
Carlos Feu Alvim
The world has experienced in the last thirty years of the last century two petroleum price shocks: the first one in 1973, unleashed by the Yom Kippur War, when the Arab producers decided to suspend exports for the USA, as punishment for the Western support to Israel. The second shock resulted from the Saudi Arabia decision to raise the petroleum “target price”, and thus added to the aggravation of the international conjuncture already affected by the concomitant fundamentalist revolution in Iran. The dollar price of the oil barrel in 2003 reached US$ 42 in 1973 and attained US$ 80 in 1979. In October 2004, the oil reached US$ 48/barrel, practically resuming levels that were close to those of the first shock.
Figure 1: Petroleum international prices in current 2003 dollars
As in 1973 and 1979, the sudden price increases were imputed to political origins linked to the prevalent crisis such as the Iraq War, tensions concerning Iran and uncertainties regarding Venezuela and Russia.
However, some price specialists remark that a systemic trend would be feeding the price increases, effectively operating even before the Iraq War, as may be noticed in Figure 2 (detail of Figure 1). Such features indicate that petroleum prices hardly would resume the 1998 levels (around 15 US$ (2003)/barrel) or even that of 1994 (20 US$ (2003)/barrel). So, these specialists bet on a future stabilization of the barrel price to by around 30 and 40 US$.
Looking back at that projection made 20 years ago, permits to evaluate its quality. For this purpose, the aforementioned projection (also displayed in Figure 3) is compared with the actual energy sources participation in the world market.
Figure 3: C. Marchetti forecastings (1984) (on top) compared to the actual evolution of the energy sources participation (below) (IEA)[iii]
The comparison leads to some interesting conclusions: oil participation share – which has been depressed by the 1973 and 1979 price shocks – has returned to the anticipated path, subsequently to the 1986 “cold shock”. It should be noted that whenever later on consumption exceeded the “natural” model anticipated path, a new oil price upsurge came about.
As regard nuclear energy, whose initial penetration largely exceeded both the observed and anticipated paces followed by other kinds of primary energies, it is clear that this energy source should resume the path initially foreseen by the model and thus will probably increase its future participation. It should however be recalled that the nuclear penetration in the third world was strongly hindered by the adoption of non proliferation policies motivated by disarmament concerns. On the other hand, its participation in electricity generation has already attained its saturation points in countries, such as France.
The largest surprises resulting from the present comparison are the respective participations of natural gas and coal. For the former, frustration may probably be due to its narrow limitations typical of this fuel: geographical distribution which accrues the difficulties connected with its transportation to long distant markets In fact, North America reserves represent only 4.2% of the global reserve. Since this country is responsible for 28% of the world primary energy consumption, inhibition concerning natural gas use in this region does indeed significantly limits its participation share in the world total. In addition to this, transport difficulties, political ones (considering the USA/Russia relations) may probably inhibit foreseeable connections between Siberia and Alaska through the infrastructure linking Alaska to the American territory through Canada. Finally, the cryogenic transport that would in principle expand gas consumption did not so far became economically feasible.
One could therefore conclude that the upper limit of natural gas participation (hard to be anticipated by the utilization of C. Marchetti’s methodology whenever applied at the very start to a competition process) might have been overestimated in that report. Actually, the maximum gas participation value attainable (~ 58%) would be even superior to the one forecasted for the petroleum share, accordingly, would already be reaching its declining phase in terms of participation in the global consumption. In fact, even in countries where large quantities of gas are availability, its generalized use as transport fuel is not yet effective also due to its limited portability. According to the International Energy Agency , transport worldwide in 2001 was carried out using 57% of petroleum products whereas only 4.8% was effected by natural gas,.
Considering that total participation of energy sources, shown in Figure 3, is by definition, normalized to 100%, for a natural gas penetration smaller than that foreseen by the method should be compensated by a larger participation of an alternative source. Bearing in mind that the other sources are close to the figures foreseen by C. Marchetti, the participation of coal must still be significant by the end of the century (contrary to the decrease anticipated by the model). This may complement the expansion of natural gas use along a pace lower than expected. It should be remarked that the observed coal and natural gas behavior in the last twenty years was already reported at the time of the article publication (1985). Admittedly, the deviations were however considered as mere oscillations (and it is possible that they are) along a dominant historical trend, possibly as manifestations of the alleged homeostatic properties of the energy technology and energy “systems” (see the J.I. Vargas article previously mentioned).
According to this line of reasoning, one may understand the current American resistance to the ratification of the Kyoto Protocol provisions as resulting from the difficulties the American economy faces to be supplied by natural gas. This alternative would be the only one capable of providing large gains concerning CO2 emission to substitute charcoal utilization.
It can therefore be concluded that the petroleum price increase may be justified by the resumption of its participation share in the world energy matrix. This implies that it returns to the previously observed path described before the 1973 and 1979 shocks. Therefore, even with the possible elimination of the appointed political tensions that have exacerbated the present oil prices, it is not to be expect that the currently observed prices would be reduced to the 20 US$/barrel level observed in a good part of the nineties.
[i] Vargas, J. I., “The Technological Prospective: Prevision with a Simple Mathematical Model”. Economy and Energy No. 45, August - September 2004.
[ii] Marchetti, C., 1985 “Nuclear Plants and Nuclear Niches: On the Generation of Nuclear Energy during the Last Twenty Years”, Nuclear Science and Engineering, 90:521--526
[iii] IAE –- International Energy Agency (, http://www.iaeiea.org)
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.