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Are the “Experts” Right About Energy?

by Michael Levi
June 22, 2012

What does the energy policy chattering class think about where the world is heading? The new issue of Foreign Policy has a neat feature that gives some interesting insight. The editors surveyed fifty-seven analysts (myself and Blake included) on a wide range of questions. The results are a mix of reassuring and worrying.

Most analysts seem to be sane on most the basics. Take a few examples: only five respondents think that the current decline in U.S. oil demand is purely temporary. The vast majority believe that shale gas can in principle be managed safely. They are also skeptical of claims that the United States could become genuinely energy independent.

But the answers to two big questions trouble me.

Here’s the first: “What are the top three geopolitical consequences we will see over the next 10 years as a result of the recent growth in U.S. energy production?”

The top answer? “Less U.S. reliance on and influence in the Middle East.” This belief continues to amaze me. Disruptions in the Middle East will continue to have roughly the same impact on the United States as they did five years ago. How that constitutes less reliance escapes me. In case you’re interested, my three answers were “Development of a more market based, less political, world natural gas market” (similar themes were the third most common response), “Friction over FDI into U.S. production and over U.S. energy exports”, and “Increasing regional ties among oil exporters and importers”.

The other question that makes me nervous is this one: “What are the top three factors affecting global oil prices?”

Forty six respondents said “Increasing demand in developing countries” (the question was multiple choice), thirty one said “War, violence, or other human disruptions”, and twenty said “geological constraints”. Those are all important factors – I included the first and third on my own list – but there’s a massive piece missing, which I ranked #1: “Politicians and government policies on resource development”.

This gets at an often neglected part of the energy conversation. There is nothing fundamental about high demand that implies high prices. Fancy televisions cost a lot less today than they used to, even though there’s a lot more demand for them. You get high prices when high demand collides with constrained supply. What the FP survey suggests is that people either don’t realize that or that they think that supply constraints are mainly about geology and war.

They almost certainly aren’t. Most of the world’s oil is owned by national governments or oil companies that make political decisions about how much to invest and produce. That, at least as much as geology, is what shapes supply. Ten year old projections of developing country oil demand aren’t all that different from where those countries are today, but ten year old projections for Saudi and other OPEC production are drastically lower. Unless you believe that that’s because those countries are running out of oil, you need to invoke politics in a big way to explain higher prices. I write a bit about this dynamic in my own essay in the same FP issue. If analysts don’t take the supply side of the equation seriously, they’re missing out on the full picture.

Post a Comment 5 Comments

  • Posted by Steve Jones

    Surely it’s a question of timescale. Of course if governments and companies fail to invest in development, prices will go up, but you would think this would be temporary and self-correcting. The incentive of high prices will solve the problem with a time lag.

    But wars don’t always respond to a price signal and geology never does.

  • Posted by James Ferguson (@kWIQly)

    What are the top three factors affecting global oil prices ?

    1) Demand for energy based services – positive effect
    2) Energy Efficiency – negative effect
    3) Relative cost of production – positive effect

    Since energy use if typically automated (control systems) it is a price taking market (zero short-term elasticity of demand)

    Therefore as supply becomes relatively expensive (and it is) the “go to” solution is energy efficiency where demand is most fixed – In the built environment.

  • Posted by Evan

    Do you think the survey responses gave adequate attention to the concerns around climate change? I found many of the answers missing any notion of the need to reduce our use of oil. Maybe thats not doing justice to questions that didn’t EXPLICITLY ask about that, but I didn’t read much implicit analysis of that issue. Thoughts?

  • Posted by Mark Ford

    Regarding ‘world’ natural gas market: At this point, there is too many winners and losers in the race to develop shale gas reserves. The US and Canada certainly appear to be in the driver’s seat where other countries like Poland, Brazil, Mexico and Argentina lack the resources, technology, and efficiencies to exploit their reserves. Everyone seeks self reliance but many factors keep this from happening, not to mention governments.

  • Posted by Paul

    As investment in renewables takes effect and the technology becomes more reliable and available the dependency on fossil fuels will tail off. For now we are caught between the two and oil is seen as the “known” quantity.
    Demand is demand for energy, not necessarily oil or gas. If an alternative was readily available and cost effective then demand would increase.

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