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Journalism of Courage
The time has come to return to fundamentals.nbsp;There is understandable perplexity as to why the price of crude oil has jumped from around 80 per barrel in February this year to close to 140 per barrel today.nbsp; Demand has certainly not shot up and there have been no significant interruptions in supply.nbsp; Speculation by the paper traders on Wall Street seems to be one explanation.nbsp; The volume of oil futures contracted on the New York Mercantile exchange NYMEX has increased significantly and the Commodity Futures Trading Commission CFTC has estimated that 68 percent of the NYMEX oil futures contracts are now held by speculators 8212; up from 57 percent three years ago.nbsp;
However, the question to which there is still no unambiguous answer is whether speculators alone are driving up the price or whether their actions reinforce an underlying trend.nbsp; The CFTC has done an analysis of the factors behind the surge beyond 120/b. Their early conclusions are that thenbsp;commercial participants i.e. companies that physically produce or use oil like the oil companies, airlines and the power utilities are the first to respond to new market information and the non-commercial participants have only consequently adjusted their futures position.nbsp; Two other studies have also suggested that there is no 8220;oil bubble8221; like with tech stocks and real estate, and that speculators are not alone in driving the price of oil beyond its fundamental value.nbsp; UBS surveyed 1048 equity analysts and strategists.nbsp; 56 per cent of the respondents said there was no bubble.nbsp; A second poll ofnbsp;324 energy investors saw 67 per cent vote for 8220;no bubble8221;.nbsp; The voting pattern does reveal, of course, that a significant number believe otherwise, so it would be wrong to conclude that speculators are not responsible.nbsp;It is clear that people simply do not know why prices are so volatile.
It is against this backdrop of opacity and confusion that I advocatenbsp;that governments now focus on three underlying long term fundamentals.nbsp; nbsp;
First the demand for energy will continue to grow, because of the growth in population and increasing prosperity.
Second, the supply of energy from existing resources will struggle to keep pace with demand.nbsp; The production of oil and gas from existing fields will taper off and it will not be easy to offset this depletion through new discoveries.nbsp; Coal will grow,nbsp;but its potentialnbsp;will be limited by infrastructural inadequacy not to mention environmental concerns.nbsp; Bio and nuclear sources will increase their share in the energy basket but their contribution may not be meaningful, because bio will confrontnbsp;limitations of land and also the unintended fallout onnbsp;food prices.nbsp; And nuclear energy will have to overcome the challenge of building three major industries 8212; uranium mining; plant construction and waste disposal.nbsp; Technology will throw open new supply frontiers but it is unlikely it will come up with a silver bullet.nbsp;
Third, the environment will face increasing stress.nbsp; We may moderate the use of fossil fuel but we cannot replace it totally.nbsp;
These are the three long term fundamentals.nbsp; Together they will drive the emergent energy system.nbsp; The question for decision makers is how they should adapt to these underlying trends.nbsp; What policies should they put in place today to ensure that their energy systems are locked onto a sustainable and stable pathway.nbsp; They could take the easy option of focusing only on supply or adopt demand management and energy efficiency.nbsp; The former would delay actions on carbon management and might push countries onto a pathway that leads to CO2 concentrations above the sustainable 550 ppmv levels.nbsp; The latter could trigger decisive action on issues like carbon trading and carbon pricing and encourage investment in carbon capture and sequestration and alternate energies.nbsp; The result would be an early plateauing of carbon emissions.
What path India will take is unclear but I would think the latter is better. The issue is whether it is currently positionednbsp;to shift itself towards that direction.nbsp; Does it have the appropriate decision-making structure to acknowledge and respond to emergent supply-demand-environmental tensions?nbsp; Probably not. The predominant focus of policynbsp;today is on supply security with limited and ill considered attention on demand management and efficiency.nbsp; Is our current energy industry structure capable of respondingnbsp;to these challenges?nbsp; Again, the answer isnbsp;probably no. The energy industry is fragmented with multiple governmentnbsp;companies under multiple energy ministries.nbsp; Is our polity prepared to encourage competition? The re-regulation of the downstream industry shows that politicians are loath to let go of this strategically important sector.
Thenbsp;long term expectation however is that prices are now onto a structurally higher plane and that short of an international agreement that brings the producers andnbsp;consumers on to the same page, prices will remain volatile both on the upside and the downside.nbsp; Our objective should be to minimize the fallout of short term volatility but at the same time to ensure that our energy system is not pushed onto a suboptimal long term pathway.nbsp;
The author is Chairman of the Shell Group in India. The views expressed are personal
