The Epilogue allows for some closing thoughts on the story told within The Prize. For most of the 1990s, oil was not as important as a strategic issue or commodity, as it was abundantly available and at a low price. Most of the attention was shifted to the emergence of China as a powerhouse in the global economy. In 1997-1998, however, Asia’s economic miracle/bubble burst (starting in Thailand), resulting in a financial panic, bankruptcies, defaults, and a deep economic downturn in most of Asia as well as other emerging markets that included Russia and Brazil. With oil supplies increasing and demand falling from the drop in Gross Domestic Product (GDP), inventories overflowed, and prices dropped to $10 a barrel, just as in 1986. Russia, just as in Mexico earlier, went virtually into default and bankruptcy. For the oil-importing countries, the fall in oil prices was like a big "tax cut" again or a package that stimulated economic growth. It helped to put the lid on inflation, pushed gas prices down at the gasoline pump, and sparked America’s passion for fuel-efficient SUVs and light trucks.
With issues on oil (security and price) taking the back seat in the 1990s, the exciting “new” thing was the Internet that revolutionized the world economy and communication. The Internet made distance suddenly disappear and the world interconnected 24/7. Suddenly, the new generation was not interested in jobs in the “old” oil industry.
Three events in the decade 2000-2010 changed the oil view after the 1990s. The first was on September 11, 2001. Major changes that have occurred in the Middle East since September 11, 2001, including the renunciation of nuclear weapons by Libya in December 2003, the emergence of Abu Dhabi, Qatar, and Dubai as global energy players and economic centers, and the protests that started in Tunisia and propagated to other states like Egypt, Lebanon, Syria, Bahrain, Yemen and Saudi Arabia for freedom and democracy in 2011. The Iraqi oil industry is still struggling to regain production due to a lack of technology, skills, security, and a strong political structure and government.
The second major event of the decade is globalization. The world economy tripled in size between 1990 and 2009, and by 2009, a major fraction of the world’s GDP was generated by developing countries as opposed to the countries of North America, Europe, and Japan. The years 2003-2007 saw the best global economic growth in a generation, and the growth implied strong demand for oil, especially in China and India to power industry, generate electricity, and fuel the many cars, trucks, and planes.
The third major feature is the surge in oil demand that caught the oil industry itself by surprise and resulted in the industry playing catch up as a result of low investments in new oil and gas supplies in the previous decade. During that decade, Wall Street actually demanded the oil industry to be disciplined, cautious, and even restrictive in its investment to avoid low stock prices. Geopolitics also contributed to restricting supply, as illustrated below using Russia as an example.
Hence the Third Oil Shock was upon us. The concern over confrontation with Iran and the fear of its impact on oil flow through the Strait of Hormuz, the “Iranian Premium,” caused an increase in oil prices. Also, the shortages of skilled labor, equipment, and engineering skills, coupled with the high cost of steel for offshore platforms and other equipment, led to high costs in developing new fields, that doubled between 2004 and 2008. This, together with the heavy investment of investors in oil as assets alternative to stocks, bonds, and real estate that could yield high returns, further drove the price of oil higher. The weakness of the dollar relative to the euro and yen further increased the price of oil, as investors hedged against the dollar’s decline. People expected demand for oil in China and India to go off the chart, resulting in oil shortage and higher prices. All the above factors, supply and demand, geopolitics, costs, financial markets, expectations, and speculations combined to push prices from $30/bbl around March 2003 to over $145/bbl in 2008. “By that point, expectations had created a bubble in which the price was increasingly divorced from the fundamentals. For as prices went up demand had inevitably begun to weaken.”
While the oil shock in 1973 was triggered by the Yom Kippur War and the one in 1978-79 by the Iranian Islamic revolution, there was no single specific event that triggered this new oil shock. The wild price fluctuations noted in the figure below align with seminal events triggering the jumps. In the US, the situation was worsened by the credit crises that hit the mortgage and financial sectors. Only when demand growth slowed markedly, in response to high prices, and the financial crises (the worst since the Great Depression) and a worldwide recession occurred did the price of oil come down dramatically. The rise in oil prices certainly led to the transfer of huge sums of money from consumers to exporters, and the drop led to less transfer of income from importers to exporters such as Venezuela, Russia, the United Arab Emirates, Qatar, China, India, and the USA.
Clearly, a growing world economy, coupled with rising income and population growth can only mean the need for more oil. Thus, for decades or even centuries to come, oil will continue to be a factor in national policies and strategies relating to politics and the global economy. It will continue to play a role in how people live. Coal politics, oil security and cost, fuel efficiency standards, alternatives, nuclear waste, and security of infrastructure (e.g., pipelines) will all continue to be questions and choices we will face moving forward.
- The Return of Oil
- A New Oil Shock
- “Running Out?”
- Energy Security
Questions to Guide Your Reading:
- How does oil change international politics and the strategies and positions of nations?
- What are the political and economic risks that come with oil, and how should we manage them?
- Is the world going to run out of oil?
- Is demand going to change?