THE oil age began 150 years ago leading to great economic prosperity that allowed the world population to expand six fold. Much of the 20 century’s economic prosperity can be explained by the abundant supply of cheap oil.

At first it came largely from the United States that opened up its extensive territories with dynamic capitalism and technological process. Discoveries peaked around 1930 some forty ears later and the focus of supply shifted to the Middle East.

However, the oil companies soon lost their control in series of expropriations as the host governments sought a greater share of the proceeds. In 1973, some Middle East governments used their control of oil as a weapon in their conflict with Israel over its occupation of Palestine, giving rise to the first oil shock that rocked the world.

The international oil companies, anticipating these pressures, had successfully diversified their supply before the shock, bringing in new oil fields in Alaska, the North Sea and elsewhere. These deposits, many of which were offshore, were more difficult and costly to exploit, but production was rapidly stepped up when control of the traditional sources was lost.

The industry found and produced the expensive and difficult oil form the new deposits at the maximum rate possible, leading the control of the abundant, cheap and easy oil in the hands of the Middle East, which was accordingly forced into a swing role, making up the difference between world demand and what the other countries could produce.

The new productive areas faced the same depletion pattern that has already been demonstrated in the US The larger fields, which ace found and exploited first, gave a natural discovery peak, and advances in technology and operating efficiency reduced the time lag from discovery to the corresponding production peaks. What took the US forty years was achieved in just twenty-seven in the North Sea, where production is now at peak.

As discovery in the accessible areas dwindled against consumption, the industry turned its attention to the last remaining frontier, namely the deep ocean Although much of the ocean is deep, only a few areas have the essential geology, giving a potential of not more than about 35 billion barrels enough to supply the world for less than four years

Oil is traded on international markets at a price set by the marginal barrel, giving rise to an unpredictable volatility that obscures the underlying trends of supply and demand.

Prices collapsed in 1993 from a combination of transitory factors. Furthermore, there were more sinister motives to talk down the long-term price of oil, as oil companies and their financial advisors planned acquisitions.

Major companies, plainly seeing that exploration should no longer underpin their future, took this opportunity to merge, successfully concealing their real predicament from the stock market. The OPEC countries did everything possible to foster the notion that they could flood the world with cheap oil at the flick of a switch.

It was a strategy aimed at inhibiting investments in gas, non-conventional oil, renewable energy or energy efficiency that they feared might undermine the market for their oil, on which they utterly depend.

But it was a short-lived price collapse. Before long, the underlying resource and depletion pressures manifested themselves again with prices rebounding in a staggering 300 per cent increase in twelve months, before another anomalous fall occurred at the end of 2000. It was partly triggered by profit taking for year-end financial reporting, and partly by the hope of a brief reprieve, because demand traditionally falls in the spring. The underlying trend is now due to reassert itself, leading to the resumption of soaring oil prices.

The Middle East fields are aging, meaning that the amount of work to maintain them rises inexorably.

It should be a simple matter to relate the long-term discovery and production trends, but in practice it is very difficult, because the data in the pubic domain are so unreliable. The oil companies have systematically under-reported the size of discoveries for good commercial and regulatory reasons.

The reserves have been accordingly revised upwards over time, giving the illusion that more was being found than was the case. The OPEC countries also announced huge spurious increases in the late 1980s as they vied with each other for production quota, which was partly based on reserves.

In rounded numbers, it appears that the total endowment is about 2000 billion barrels of which about 1800 billion barrels have already been found and 850 billion barrels produced to-date. Many claims are made that technology will extract more oil from known fields, but in fact the main impact of technology has been to hold production higher for longer, with little impact on the reserves themselves.

Finding and producing oil is not just a matter of investment and technology as the economists used to maintain, but is subject to now well understood natural limits.

Typically, production rises slowly in a new areas as exploration reveals its secrets, but then accelerates rapidly as giant fields deliver a flood of oil, producing a natural peak. They in turn are followed by progressively smaller fields and satellites, as the operators desperately try to maintain production, seeking out subsidiary reservoirs and minor untapped compartments within existing fields.

In a country with a large population of fields, peak comes close to the midpoint of depletion, when half the total has been consumed. The world pattern is less straightforward, because production has been artificially constrained by the OPEC countries. Exactly when decline starts depends on many unpredictable factors, but we may be sure that we will have to face this historic turning point between 2005 and 2010.

The non-swing countries have already passed their peak, meaning that the share coming from the Middle East is set to rise, given that these countries are willing and able to invest in the mammoth task of off-setting the natural decline of their aging giant fields. These circumstances leave little doubt that the approaching peak will be accompanied by soaring prices.

Prices in 2004 crossed $50 per barrel with global energy use increasing steadily through to 2030, global primary energy demand is projected to increase by 1.7 per cent from 2004-2030, reaching an annual level of 15.3 billion tons of oil equivalent. This increase will be equal to two times of current demand.

These-circumstances leave little doubt that the future scenario will be accompanied by soaring prices. The days of cheap oil are history.

Much of the Arab world’s oil on which the West thrives lies in the Shia belt. The Shia’s are astride Saudi Arabians richest oil reserves along its eastern seaboard. Iraqi and Kuwait oil also lies in the Shia lands along with the oil wealth of Iran, this accounts for half the world’s reserves.

The emerging sectoral divide created by the US efforts to democracy is bound to impact energy prices with a disabling impact in the Arabian Gulf. American forecasts indicate prices at $75 to $100 per barrel during 2005—2010.

Many developed economies can sustain a price of $100 per barrel without triggering a recession, but the vulnerable developing economies like Pakistan are being severally damaged economically by high oil prices.

As motor gasoline demand rises in summer and heating oil demand rises again in the winter of 2005, could oil prices cross $75/barrel ?

Goldman Sachs in a recent report has cautioned, that in extreme circumstances the prices could spike to $100/barrel. But even if circumstances are not extreme, even if we see no terrorist attacks, no strikes, and no supply disruptions, I strongly feel that prices will keep going up.

Why? because, there is a fundamental supply and demand imbalance for oil in the world economy. Production is just about enough to meet demand. There is no spare capacity to take care of unforeseen shut downs, supply disruptions or a further rise in Chinese demand.

No major oil fields have been discovered for years. Ever since the prices of oil fell to just under $10/barrel in 1999, oil companies have invested very little in exploration and refining.

Lack of investment for years means that global production is not in a position to meet burgeoning world demand. Even if crude inventories rise (as in the USA recently refining capacity is insufficient, so petrol is scare.

High price today represent a demand driven imbalance, not a supply driven one. The previous three oil shocks 1973, 1980 and 1991 were all on account of supply disruptions in war context. These led to global recession that reduced oil demand and prices to more moderate levels.

But this time there is no supply shock. World output is rising though very slowly. However demand is galloping in China and India (and other Asian countries to a lesser extent). The world economy grew at 5.3% last year (1994). The fastest rate for three decades. The consequent rise in demand has taken every body by surprise. Supply is inadequate even though every OPEC producer save Saudi Arabia is producing flat out. Most estimates suggest that Saudi Arabia has only a limited ability to raise production in the immediate future (perhaps 1 million barrels/day).

No recession is in sight despite high oil prices. One reason is the huge US trade and budget deficit which has pumped out enough dollars to enable the world economy to pay more for oil and yet keep growing.

A second reason is that world GDP is far less material intensive than in earlier decades, so that even a sharp rise in commodity prices (of which oil is only one) has generated only moderate inflation.

In the short run the absence of high inflation will encourage consumer spending, helping ward off a recession. The bad news is that rising consumer spending will probably send oil prices even higher to a point where it really hurts.

Many analysts argue that oil now forms a very small share of household consumption in the rich West, so a global recession (caused by falling consumer demand) is unlikely at $58/barrel, and may not occur at all unless the price rises to $75+/barrel.

Will the price hit $75, will there be a recession? However nothing short of a recession in the USA looks like bringing down global consumption and thus rectifying the fundamental supply- demand in balance in oil.

There is little chance of China and India reducing their consumption, and they are growing rapidly and have rising forex reserves in the face of record oil prices. Any slowdown will have to originate in the west.

Some optimists argue that provided the US keeps running ever bigger trade deficits, the world can keep growing ever at $75/barrel. This may work for some time, but this reprieve will be temporary and within the course push oil even higher, towards $100/barrel plus.

The possibility of Saudi Arabia increasing their production very substantially within a year, if it so wishes, and this can bridge the supply-demand gap, is not borne out by any concrete evidence.

My own evidence suggests that oil prices will keep rising and could touch $ 75/barrel within 12- 14 months.

Hydrogen and Fuel cell technology represents a strategic choice for energy deficient countries like Pakistan. The vision of hydrogen representing the new frontier of global energy has been clearly outlined by Romano Prodi European Unions Vice- President of the Commission of Energy and Transport who states, “Hydrogen and Fuel cell technology represents a strategic choice for Europe within the next 20- 30 years, it will change considerably our society and economic growth patterns, by bringing about a decentralised and cleaner model of energy production and distribution.

Hydrogen is an environmentally friendly technology. It produces electricity and heat by combining hydrogen and oxygen with water vapour as its only by-product. The hydrogen technology will be a strong factor in energy security and diversity of energy supply.

(The writer is a former federal minister for petroleum and natural resources).