IS oil on its way out? Recent weeks have seen a spectacular collapse in demand for oil brought about by alarm signals of recession in major industrial countries, following the unprecedented turmoil in world financial markets. The speed of the collapse has delivered a painful shock to oil producers. Saudi Arabia, Iran, Iraq, Abu Dhabi, as well as Russia, Venezuela, Nigeria, Mexico and others have been forced to review their budgets, defer some mega-projects and rethink their development strategies – and even in some cases their foreign policy. The question everyone is asking is how long will the bad days last. When will demand for oil recover? The oil producers are, of course, aware that fundamental changes in energy policies are being discussed all over the world, not least in the United States. Barack Obama, the Democratic contender in next week's president election, has called repeatedly for America to free itself from dependence on imported oil, while his Republican rival, John McCain, has called for America to build 45 nuclear power stations, and then another hundred. But curbing America's appetite for oil can be only a long-term ambition, which might be realized in 20 or 30 years' time, depending on breakthroughs in technology. In the meantime, demand for oil must inevitably pick up once the current recession is over. Oil producers need not, therefore, be unduly worried, although they are likely to experience a year or two of comparative hardship. Most experts believe that fossil fuels will continue to provide most of the world's total energy for several more decades. The immediate outlook, however, is grim. In Japan, oil consumption has fallen by 12 percent from a year ago; in France it is down by 10 percent (more people than ever are using bikes in Paris), while consumption in the United States, which accounts for a quarter of world consumption, is expected to be down by five per cent. As sales of vehicles slump, American car manufacturers are crying out for relief from the government. China's breakneck industrial growth is also bound to slow down as demand for its exports falters, especially in the United States. China's gargantuan appetite for oil of recent years must surely now be tempered. Not surprisingly, falling demand for oil has led to a collapse in oil prices. Earlier this week, Brent Crude was trading at a shade over $60 a barrel down from a peak of close to $150 three months ago. Only a short while ago, oil producers jubilantly enjoyed stupendous oil revenues. In 2007, high prices earned them almost $1,000bn, and 2008 was also a good year, except for this last quarter. The International Monetary Fund says Iraq will need an oil price of $110 a barrel if it is to rebuild its oil industry and achieve its goal of doubling its present output of 2.5mbd within a decade. That dream is now evaporating. In Venezuela, Hugo Chavez, declared that an oil price of $80-$90 would guarantee the safety of his socialist welfare programs. But this is well above present levels. His economic plans and his extensive aid to foreign friends may have to be cut back. His defiance of the United States may become less combative. That other populist leader, Iran's President Mahmoud Ahmadinejad, raised his people's expectations by distributing oil money, giving loans to the poor, and allowing imports to soar. To finance this largesse, he spent his current oil income lavishly but also plundered Iran's stabilisation fund. He would need an oil price in excess of $80 to stay on his current course. However, critics of his spendthrift policies are beginning to speak out, compromising his chances of re-election next year. Russia's budget is thought to be based on an oil price of $70 a barrel. If the price were to remain well below that for a year or two, Russia would feel some pain, although its economy is cushioned by stabilization funds of some $200bn. The Arab Gulf States also have large reserves, but they also have large spending plans. The recent sharp falls on the Kuwait stock market, triggered by heavy losses of the Gulf Bank, the country's second largest, will serve as a warning to Kuwait's neighbors of what might be in store for them. What are the real threats to oil? They are far into the future. Europe, for example, is planning to spend one billion euros on exploring the possibilities of hydrogen technology. The European Commission in Brussels is putting up half the money for this hydrogen project in which some sixty firms are taking part, together with many research centers and universities. Nuclear power is making a comeback because of fears over energy security and climate change. For example, EDF, the French electricity giant, has recently bought British Energy in a deal worth £12.5bn. It has thus acquired most of Britain's nuclear power stations and committed itself to investing £10bn more in building four large new ones. In recent years, corn-based ethanol was seen by many as a viable alternative for oil. Scores of ethanol plants were built in the US, eating up nearly one quarter of the US corn crop. But this created a glut which pushed down ethanol prices. It also contributed to pushing up food prices in poor countries. One way and another, the excitement has gone out of ethanol. Wind, wave and solar power continue to attract considerable investment in both Europe and America, as do electric vehicles, but no real competitor for oil has yet appeared, nor is likely to appear for a decade or two. For oil producers, the good times will soon return but, next time round, they would be wise to husband their scarce resources for the day, looming already on the far horizon, when oil is no longer indispensable for industrial societies. __
