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Oil price rise makes fools of us all: “apologies to Sir Mark Moody-Stuart for reminding him of this little gem…”.

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Oil price rise makes fools of us all

The price of oil can make anybody look silly, so apologies to Sir Mark Moody-Stuart for reminding him of this little gem. In October 2000, as chairman of Shell, he commented on the rise in the price of a barrel to $30 (£15), a surge from $10 that was provoking consternation at the time: “In the longer term, technology will increase production capacity and tend to drive the oil price somewhere below $20 a barrel.”

The point of quoting the remark is not to embarrass its author, but to illustrate one reason why the price is now $135 a barrel. Through the 1990s, and into this century, companies such as Shell were making investment decisions based on assumptions of $20 oil. They were slashing their exploration budgets and cutting back on technological spending – the very things that were meant to keep the oil price down. You reap what you sow in the oil business – the lag is about 10 years, which as long as it takes to turn a discovery into a production facility.

So it was always possible that the price of oil could leap if demand soared. That’s exactly what happened, of course. Asia, from being an economic basket case in the late 1990s, became the engine of world growth from 2002 onwards.

Now that $100-plus oil is here, the producers are naturally keen to enjoy it. The key players are no longer the oil majors such as Shell. Resource-rich countries such as Russia, Venezuela and Iran are sufficiently confident to do without their help (or, at least, they demand a bigger slice of the spoils). The balance of power has shifted.

President Bush was reduced last week to pleading with Saudi Arabia to increase production, but secured only a token increase. Even that provoked condemnation from other members of the Opec cartel.

The only good news is that $135 carries the whiff of “too much, too soon”. Three months ago, the headlines were about the soaring price of wheat; the price of a bushel has fallen 40% since then, albeit to a level well above norms of recent years. So, it’s quite possible that oil could retreat to $100 as rapidly as it has risen. After all, we are, finally, seeing examples of price affecting demand. American Airlines is cutting jobs and flights, and won’t be the last airline to do so.

But how about Moody-Stuart’s longer term? Frankly, the arithmetic looks horrible. The world produces about 85m barrels a day at the moment. To get to 120m by 2020 – which is what some models of global growth demand – looks an uncomfortable journey in which the producers have all the power.

http://www.guardian.co.uk/business/2008/may/23/oil.commodities

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