Oil prices only going up, analysts warn

Wednesday, November 14, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Shell International BV analysts Choo Khong and Peter Snowdon forecast here Tuesday that international oil prices would go nowhere but upwards, and that fossil fuels -- oil, natural gas and coal -- would continue to dominate the energy mix until 2025.

"What matters is not the actual number, whether it is US$100 or something else, but the direction of oil prices, which is firmly upwards with some volatility," noted Choo when presenting Shell Global Scenarios to 2025.

They shared the views of the International Energy Agency that China and India, given their sheer sizes and robust economic growth, would play increasingly important roles in the international energy markets.

The Shell report says that China, having doubled its oil demand over the last decade to 6.4 million barrels per day at the present time, has become the world's second largest oil consumer, accounting for almost 40 percent of the increase in global oil demand.

Yet more worrisome in terms of oil demand is that the energy intensity of China's economic growth, like that of most other developing nations, will continue to increase until the next decade, reaching as high one barrel of oil equivalent for each US$1,000 of output.

So what governments do in the policy field now in order to improve energy efficiency will determine the global energy landscape, energy security and rate of climate change ten years down the road, Snowdon said.

"Measures to improve energy efficiency are the cheapest and fastest way to curb demand growth," he said, while urging governments to put in place incentives and policies that stimulate energy efficiency measures and investment in fuel conservation.

According to the Shell report, the annual increase in proven oil reserves in the world has slowed down from 4.5 percent in the 1980s to one percent in the 1990s, and new oil discoveries have been getting smaller in size.

Hence, Snowdon added, there is now a tightening in the supply-demand balance.
The message from the IEA's World Energy Outlook, which was issued last week, is even starker.

It warned that if governments around the world stick to existing policies, the world's energy needs could well be more than 50 percent higher in 2030 than today, with China and India together accounting for 45 percent of the increase in global energy demand.

Snowdon said that fossil fuels -- oil, gas and coal-- continue to dominate the energy mix worldwide. Of these, coal is set to grow most rapidly, driven largely by power-sector demand in China and India.

The IEA predicts that the consuming countries will come to increasingly rely on imports of oil and gas from the Middle East and Russia, while net oil imports in China and India combined will jump from 5.4 million barrels/day in 2006 to more than 19 million barrels/day in 2030, which is larger than the combined imports of the U.S. and Japan today.

According to Shell, the question now is which price mechanism can be relied upon to generate the appropriate signals, investment and technological developments.

The IEA is more blunt in its policy recommendation, urging governments to let market forces do their job more effectively by removing fuel subsidies that hide the true energy costs.

In many countries, including Indonesia, oil prices often do not reflect the real and full costs of the energy because of government subsidies, thereby hindering the viability of investments in energy efficiency and renewable energy.

Government subsidies keep the gasoline price in Indonesia half the price as that paid by people in Singapore.

But because of the generous subsidies for oil fuels, the oil market in Indonesia has failed to function well as there is no significant demand response to price signals.