India’s biggest agony – or so we learn from the numerous media mentions – is OIL. Specifically crude. Every time a small war or a big skirmish takes place, near or far, the mandarins at the various government departments shake in their designer socks and pass on the nerves to us, via the various media channels available. And in this case, India is not the only one, thank the Lord. Across the fast-growing countries in Asia the concerns on the price of crude are just as acute as it is here. These are the countries that is driving the growth of the world economy and the region is woefully deficient in having a native oil reserve that it can tap into.
In June of 2022, crude (WTI) had touched a high of USD 121 and since then it has come down sharply to its current USD 67/68 per barrel odd. Essentially, if we are to index the rate of inflation on the current prices, the same 68 odd USD per barrel of WTI crude would be at the 57/58 USD per barrel. Contrast this to the USD 148 per barrel perhaps 12-13 years back and it will seem we are getting crude for free now.
And all this has happened inspite of significant geo political trouble and flare points. In recent times we have had the Israel-Iran conflict which, if it had happened say a decade back would have seen the crude prices spurt by 25%-30%, if not majorly more. Before that we had the Russia-Ukraine war which again had the potential to spike the rates by the same margin. Instead, we have the prices settling to a lower level. Skirmishes here and there and localised wars have been a recurrent theme over the last few decades and nothing has changed.
Why should crude prices rise? There is no reason at all. The demand for crude, for energy needs is coming down sharply at the rate of 5%-6% annually. So, over the next decade this will imply that demand for energy from crude comes down by half. And this is just an estimate driven by experience of the last decade. What if, starting today, demand were to come down by 7%-8% and we will see demand drop of the same level in the next 5 years. And this is with existing technology. As technology improves for extraction and refining, the difference could be telling. Further imagine an equitable world where every country can sell to whom they want to and in a currency of their choice (or at least a choice from a basket of currencies). The biggest reserve holder (Venezuela) and Iran are barred from supplying to the world due to sanctions. Imagine. The top 2 in the top 3 reserve holders are not even in the fray (or perhaps are but minimally). What happens if these two come into the markets. Bringing in another 20 percent in supply. Prices will plummet further by another 20%-25% from the current 68USD and bring it down to the 50 USD level. Iraq, Kuwait, Russia, Libya are the other large reserve holders that are not very active participants in supplying all over the world. Apart from Russia, the rest three do not even have the wherewithal that they had before wars ravaged their systems and infrastructure for extraction and transfer (over land or sea). We have the situation where crude is going down and the major reserve holders (7 of the top 10 in the world) are not even a part of the global delivery system.
Add to the above the extraction technology from fracking. Who knows if there is a marked improvement in the years to come that makes it profitable at even say 40 USD. And the way technology is evolving there is every chance that the tech challenge will be met someday soon. Addition of new reserves is also happening at more than 5% per annum and this is calculated on a decadal basis. Huge improvements in alternatives – wind, solar, tides and storage are creating a seismic shift in other avenues to feed growing energy needs. And transportation of energy is becoming cheaper, easier, and losses are coming down all the while.
Summing up.
More Crude reserves Holding countries in the trade +
Increasing Reserves +
Improving extraction technology +
Improving Alternates +
Improving storage and transport and Transmission +
Slowing global Growth =
Crude available at 30 USD per barrel
If crude prices were to fall this low, it would likely have a domino effect on everything from alternative energy investments to global political stability. While it’s a theoretical scenario, it’s definitely worth monitoring as trends in energy consumption evolve.