In for oily problems again

The sharp oil price increase was not as unexpected as it seems; the signs were there several years ago. And now more increases are predicted.
Issue date : 04 July 2008

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The world’s economies run on oil. In the 1970s, a four-fold increase in the oil price, mainly as a result of an Arab embargo on oil exports, nearly brought the world to a standstill. A few years later, South Africa’s fuel supply situation caused the government to implement strange measures like prohibiting the sale of fuel after a specific time or transporting fuel without a permit, and limiting the maximum speed on national roads to 80km/hour. Few people know it, but back then, government was also ready to implement fuel quotas.

Since then, we’ve become used to an abundant supply of fuel. But for about the last five years there have been clear signs that the global oil supply was under pressure and, in the last year or two, stagnant oil production and increased consumption in emerging economies resulted in a sharp increase in the oil price. Oil traded at below US0/barrel at the end of 2007 and since then has increased to around 134/barrel. Whose fault is it? The sharp fuel price increase has sparked a worldwide witch-hunt for the guilty parties. Speculators are accused of increasing the demand for oil by buying oil futures at inflated prices.

However, the trade in oil futures doesn’t affect the supply and demand of fuel oil on the market, as it takes place in paper oil. One should also bear in mind that futures trading is a zero-sum game and that for every barrel bought, there’s also a seller prepared to sell at that price. Higher futures prices may encourage people to hoard oil in anticipation of future higher prices, but there’s still little sign of higher oil inventories. The price of some commodities not traded on international exchanges has also increased sharply – cadmium has increased twice as much as the price of oil. O il companies are also accused of profiteering, because in spite of record profits, they failed to increase output and refinery capacity.

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Like other companies all over the world, they regarded the current year’s financial results as more important than the long-term profitability of their operations. Locally we’ve seen this failure to develop production capacity in such diverse industries as electricity supply and the manufacture of carbon dioxide for soft drinks. I n some quarters it’s become fashionable to say that the global oil supply is running out and that we may soon be without oil. This is untrue. In fact, total world supply in terms of proven reserves has remained relatively constant, increasing from 1 049 billion barrels in 1996 to 1 208 billion barrels in 2006. The development of methods to harvest Canadian tar sands and oil shale adds another 164 billion barrels to this total.

The challenges Meanwhile, increased exploration and development costs have slowed down the rate of oil recovery. New finds like the huge fields in deep water off the Brazilian coast will take many years to come online. D emand, on the other hand, has grown so quickly that there’s no slack in the system and even a small shock causes bigger problems. Countries in the Middle East and Soviet Union, fired by their own brand of nationalism, limit access to prospectors from oil companies. Newer oil fields are in technically challenging places either in deep water or within the Arctic Circle. Alternative sources such as coal, bitumen and shale are more expensive than oil wells. n time, the steep increase in the oil price will result in the development of cheaper alternative energy sources.

The previous oil crisis resulted in a complete shift out of oil for power generation, except in South Africa where Eskom’s lack of planning forced people to buy oil-fired generating plants. The current oil crisis has already resulted in a worldwide shift to more energy-efficient methods and it may also result in shifting oil out of transport use. Implications for farmers The Bureau for Food and Agricultural Policy (BFAP) predicts steadily rising fuel prices and estimates a diesel price of R10,49/â„“ for 2008, increasing to R13,22/â„“ by 2014. The petrol price will probably increase to R13,17/ â„“. BFAP expects biofuel production in South Africa to start in 2009 and increase to 329 million litres of bioethanol and 63 million litres of biodiesel by 2014, but this production won’t have a significant effect on the fuel price. n-farm production of biodiesel is a future possibility, provided a more certain supply of feedstock than used restaurant oil can be found.

Bioethanol production will also increase. As maize doesn’t receive the 100% fuel levy exemption, the bulk of bioethanol will still come from sugarcane. There’s little farmers can do to lower the fuel price and they will therefore have to find ways of minimising use and cost. Farmers will also have to save fuel by cutting down on their cultivation practices, but fortunately the latest biological production methods are more energy-efficient than traditional methods of cultivation. Dr Koos Coetzee is an agricultural economist at the MPO.

All opinions expressed are his own and do not reflect MPO policy. |fw • global farming The sharp oil price increase was not as unexpected as it seems; the signs were there several years ago. And now more increases are predicted. In for oily problems again by koos coetzee