January 23, 2006	Monday	Zilhaj 22, 1426

ONCE again, the international oil prices have started moving upward. Crude prices steadied over the week after hitting a 3-month high on January 12 reportedly due to fears of supply disruption in Iran and Nigeria. New York’s main contract light sweet crude for delivery in February struck $65.05, the highest point since October 3, 2005.

The upward trend in oil prices during the last couple of weeks has been attributed to a host of factors, namely cold rain and snow in the North-eastern United States, recent row between Russia and Ukraine over export prices of natural gas and global concern regarding supply disruption in Iran and Nigeria. Traders had expressed the view that speculative buying was the main force behind the rally.

The international oil prices were reported to have risen by 40 per cent in 2005. They reached a peak of $70.85 per barrel on August 30, 2005, when hurricane Katrina had caused severe damage to the oil production platforms in the Gulf of Mexico.

After reaching its peak on August 30, the price of oil showed a downward trend. It continued to decline and at one stage the price came down to $56-57 per barrel. One of the reasons for the downward trend in the international oil prices was that the demand for oil in the US had weakened considerably as a result of widespread devastations caused by hurricanes Katrina and Rita and evacuation of hundreds of thousands of people from the affected areas.

At one stage, the analysts had even started expressing their apprehension that the situation might lead to a global recession. The oil market must be watching the whole situation with caution. It did not obviously like to trigger a global economic slowdown by keeping the oil prices at a very high level in the aforesaid situation since it knew that such an economic slowdown could play havoc with the oil market and pull down oil prices even below $40 a barrel.

Nevertheless, Opec as well as the non-Opec oil exporters would like to accept the best price for their product, if the consumers were ready to pay and the higher price did not pose any danger to the oil market.

Now that they thought the situation in the US had, more or less, stabilized and the global economy was also moving satisfactorily, the international oil prices had started moving higher. However, Opec and the other oil exporters may still have an eye on demand and the global economy.

According to oil analysts, what we are seeing today in terms of sky-high prices of oil is the result of two decades of under-investment. From 1985 to 2004, companies kept their spending on the search for new oil resources at a very low level and even current spending is much less than what may be needed to prevent shortage of oil over the next two and a half decades, according to the International Energy Agency in Paris.

Even when oil prices (and profits) had started to recover after the 1998 nosedive, leading oil companies failed to invest adequately on oil exploration. Thus, when the demand for oil witnessed an upsurge in 2000, oil companies were unable to respond by quickly increasing the supplies.

It is understood that the oil-related investment started picking up in 2004 and that the leading oil companies had spent around $192 billion on oil exploration in 2005. However, the investments still reportedly remain constrained as the companies have to work hard to find out deposits that may be large enough to ensure reasonable profits.

Oil companies agree that there are huge unexplored resources, the world over, but the problem is that bulk of these resources are either in the Arctic or places like Iraq. The largest of the deposits are either in far off and remote areas or buried very deep in the ground, which makes the oil deposits rather unattractive from cost point of view.

Oil executives are of the view that it was partly because of higher costs that an oil refinery was not built in the US – the world’s biggest oil market – since 1976. As a result of shortfall in the oil refining capacity fuel prices had witnessed an unprecedented rise in the US in the recent months which had hard-hit oil-dependent industries such as the airlines.

In addition to the higher oil exploration and refinery costs, development of oil-fields and production of oil are becoming more and more difficult, with the passage of time. According to a recent report, Exxon Corp had undertaken in 1995 to help develop oil-fields buried under the frozen sea-water of Okhotsk. The $12.8 billion project had remained abandoned since 1979 due to problems too difficult to be resolved. In order to tap this oil deposit (Chayvo oil deposits), Exxon had to build on land a 22-storey drill to burrow a mile into the ground and then six miles horizontally under the sea. In October, 2005, the oil deposits had produced its first barrel of oil, after 26 years.

In another similar instance, Chevron had recently used steam- flooding to extract heavy oil that was previously considered unrecoverable. In this case, one single oil-field contained as much as 1.3 billion barrels of oil.

Despite the higher costs and difficulties involved in the development of oil-fields and production of oil, the problems arising out of the current oil situation can not be kept unresolved.

No country of the world can do without oil and, in particular, countries depending on oil imports are suffering a great deal due to rise in oil prices and a volatile oil market. The oil giant Chevron has suggested an action plan to deal with the current oil situation which is summarized in the following paragraphs.

As a first measure, according to Chevron, the energy industry should try to get more oil from the existing oil-fields, while continuing the search for new oil reserves. As stated in the preceding paragraphs, the oil companies had invested $192 billion in 2005 to find and develop new wells. The aforesaid investment, according to reports, showed a 13 per cent increase over previous year’s figures.

Second, automakers must continue to improve fuel efficiency and perfect their hybrid vehicles. The US has already asked its auto manufacturers to improve fuel efficiency in their future production, which means that future vehicles will be designed to give more mileage with less fuel consumption.

World-renowned Ford motor company has announced its plan to manufacture 250,000 hybrid vehicles a year by 2010. The company, also, has a plan to produce another 250,000 ethanol-ready vehicles in 2006.

Third, as suggested by Chevron, governments (the world over) should encourage technological improvements so that wind, solar and hydrogen can be a more viable part of the future energy equation. Chevron itself is reportedly committing more than $300 million on a yearly basis for the development of clean and renewable energy resources.

Last but not the least, the action plan suggests that conservation efforts should be redoubled and oil consumers – to whatever groups they might belong – should fully cooperate in these efforts.

The action plan concludes by saying that although the problem is formidable, the energy equation (demand versus supply) can be balanced if all the parties decide to work together to achieve the objective.

So far, as Pakistan is concerned, it needs to take a few more steps, in addition to those already taken, to address the problems arising out of the current oil situation.

In the first instance, a serious effort needs to be made to bring about economy in the use of oil. In Pakistan, the percentage of wastage and misuse is very high due to lack of awareness and poor governance. It is felt that oil consumption in the country can be easily brought down by 20—30 per cent through better management, if a nation-wide campaign involving the people, the media and the NGO’s is launched to achieve the objective.

Automobile manufacturers in Pakistan should be asked by the government to lay special emphasis on producing more fuel-efficient vehicles in future, following the example of other countries.

There seems to be no logic in importing cars at a time when the trade deficit has ballooned (partly because of rising oil imports) and the balance of payment (BOP) position threatens to deteriorate, posing great danger to our macro-economic-stability. If this is being done to bring down the prices of locally manufactured cars, some other measure may be considered to achieve the objective instead of allowing liberal imports of cars.

Finally, government efforts to find oil within the country may be redoubled. Nothing would be better than having our own oil production, as far as possible. That would reduce our dependence on foreign oil in a volatile international market.