By GENE EPSTEIN
The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the U.S. economy while potentially crippling the economy of Vladimir Putin's Russia. Vast new discoveries of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a barrel over the next five years from a current $100.
The demand side, too, will put pressure on the supremacy of petroleum. For the first time in its 150-year history, the internal combustion engine can be run efficiently on alternative fuels from a number of sources, including natural gas. As these alternatives are increasingly introduced, global consumption of oil will slow its growth and flatten out.
Citigroup's head of global commodity research, Edward Morse, believes the combination of flattening consumption and rising production should mean that "the $90-a-barrel floor on the world oil price over the past few years will become a $90 ceiling." Within a new trading range with a $90 ceiling, Morse sees an average of $75 as plausible.
That's a far cry from the old paradigm, promoted in the past 40 years, which posited ever-greater demand for petroleum as developing economies grew, and a slowdown on the supply side -- the looming prospect of "peak oil," whereby global production maxes out and falls into decline. To the contrary, unconventional sources of crude oil totaling more than a trillion barrels -- the equivalent of more than 30 years of extra supply -- have been discovered in the past five years. The majority is recoverable at $75 or less, and much is now being tapped.
Within the next five years, growth in U.S. production of oil should make this country a net exporter, ending a pattern that has persisted since World War II. "While this country will still be importing plenty of medium and heavy crudes, most of the imports will come from Canada and Mexico," says Morse. "So the U.S. will no longer have to worry about disruptions in supply that might disrupt economic activity. That's why we call it the era of North American energy independence."
British economist Alfred Marshall famously likened supply and demand to the blades of scissors, and the blades are also poised to cut oil prices in the rest of the world. On the supply side, unconventional sources of oil are being tapped in countries that include India, Bahrain, and Uganda. On the demand side, a third of the auto fleet in Brazil can already run on fuel other than petroleum.
THE RECENT AGGRESSION by the oil-and-gas exporting nation of Russia reminds us of the fragility of global energy supplies. At the same time, the oil-and-gas abundance in this country has influenced concrete proposals for dealing with Russia. Energy consultant Philip Verleger has publicly proposed as a "meaningful response to Russian aggression" that the U.S. sell the nearly 700 million barrels in its Strategic Petroleum Reserve as a way to "drive oil prices down and impose significant harm on Russia," since the SPR is "no longer needed for national security." And an editorial in The Wall Street Journal recently proposed that the Department of Energy "approve immediately the 25 applications for liquefied natural gas…export terminals," since "every dollar of U.S. gas is one less dollar flowing to Mr. Putin's economy."
Such proposals would have been unthinkable as recently as five years ago, when the old paradigm was still dominant and domestic supplies of oil and gas were a source of worry.
Over the next five years, the effects of the global oil-and-gas boom should prove a grim object lesson for the Russian economy on the downside of the "resource curse." Russia's economy "largely depends on energy exports," according to a study from the U.S. Energy Information Administration. That works well when prices are high, but quite badly when prices fall.
Oil-and-gas revenues account for 70% of Russia's total exports and more than half the income of its federal government. Russia exports more than seven million barrels of oil a day, second only to Saudi Arabia. One key difference between Russia and the No. 1 exporter is that more than 60% of Russian oil is produced in Siberia, where costs are much higher. A fall in the world price to $75 from $100 would therefore have a much greater impact on the net revenues that Russia earns from oil than is earned by the Saudis.
The downside of the resource curse could also be felt in Russia's reliance on sales of natural gas. About 75% of Russia's natural gas exports go to Western Europe, providing 30% of its requirements, at prices that are two and three times the price in the U.S. That enormous premium stems from the fact that there is no world market for natural gas, given the prohibitive cost of shipping it in its unaltered state. Hence, the argument for accelerated approval of liquefied-natural-gas export terminals. With abundant natural gas now available in so much of the world -- including Australia, South Africa, Brazil, and Argentina -- within the next five years, something resembling a global market in liquefied natural gas will likely develop. That would break the local monopoly of the Russians in their market, enabling Europeans to buy from other sources, and weighing on the premium Russian gas now commands.