A new agenda needed for oil

In a barely noticed statement last week the BP Chief Executive Officer John Browne said that he thought the era of cheap oil was over, and at the same time Opec met with the oil giants in Vienna to discuss the market outlook.

Most analysts have given up predicting a return to the old Opec price band of $22 to $28 a barrel, something that looks eons away from today's $45 per barrel oil price. Instead the debate focuses on the size of the geopolitical risk premium and when, if ever, it will come down.

Perhaps instead the debate should be focusing on the demand position in the oil market. Millions of new Chinese car owners who just were not there a few years' ago tell a different story. So too does the economic recovery in Japan and the rest of Asia, even if the recovery in the USA and Europe looks less solidly based.

The Asian recovery is, of course, linked to the boom in China. This is the factor that ExxonMobil CEO Lee Raymond thinks could double world oil demand by 2020.

Now unless oil producers start to invest in new production capacity - and with the honorable exception of Abu Dhabi nobody is doing anything except talk - oil prices will have to go a lot higher to cap that new demand, and might just bankrupt the world in the process.

The obvious way out is for the oil producers to build up new capacity. But in order to do this they need to reach a new accommodation with the multinational energy companies, and a repeat of the Saudi gas project fiasco - with billions worth of projects handed out and then later cancelled - will not be good enough.

Indeed, the present mistrust between the oil companies and most of the producer countries is not the best environment for foreign direct investment, and the oil companies may decide that the interests of their shareholders are best served by allowing oil prices to surge much higher and to stay there.

Only then would a worldwide outcry lead to a reassessment of conditions for investment, and there would be political pressure for a resolution. At present politics are a primary source of instability in the global oil market, and this needs to be reversed if the supply situation is to be properly addressed.

On balance, we seem destined to live with high oil prices for some time to come, and the economic effects will become more pronounced as time goes on with the shift in the terms of trade against the oil consumers and towards the oil producers.