I’ve said before that the easing of oil and food prices that followed the credit crunch and the global downturn gave policymakers a window of opportunity to take preventive action on scarcity issues. Now, alas, I think that window is starting to close – without their having done much about it.

To see why, first take a look at what the oil price has been doing over the last year (Brent crude futures, $/barrel; h/t BBC):

Then, put that against the longer term background of what’s been happening since 2000 (slightly older data here, via Mongabay, but usefully puts the BBC graph above in context):

As the second graph shows, today’s level of just under $80 per barrel already brings us back to where we were in around July 2007 – and that’s during a still shaky recovery from what’s generally agreed to have been the worst global recession since the early 1930s.

This is a striking rebound in such weak economic conditions – and calls to mind the consistent warnings from the IEA over the past 18 months that the collapse in investment in new supply during the financial crisis and subsequent downturn has set the stage for a new oil price crunch as soon as recovery gets underway (not to mention the fact that IEA’s chief economist thinks we’re looking at peak oil as soon as 2020).

With the oil price headed upwards, food prices can be expected to follow – because higher oil prices make biofuels more attractive, and raise the prices of on-farm energy use, fertilisers, transportation, distribution and various other elements of our energy-intensive food supply chains.

Sure enough, if we take a look at the latest FAO food price index, we find that it too has been quietly heading upwards over the last few months – and is now likewise back at where it was in July 2007. At that point, of course, the food spike was already well underway, with the tortilla riots in Mexico City that served as a wake-up call for many policymakers having come almost six months earlier.

On top of this, remember the really key point that the fall in food prices that took place during the global downturn gave minimal respite to the world’s poorest people – precisely because even as prices fell, they were also getting hammered themselves by the downturn.

The starkest indication of that is in the global total of undernourished people (shown here in a graph from the FT); when you realise that we haven’t just lost the progress of the last few years, but are in far worse shape that at any time since the last 60s, you start to see just what a catastrophe the combination of  food / fuel price spike followed by global downturn has been for development:

As I’ve argued in numerous previous posts, we were never out of the woods on the food / fuel pincer movement; it was the collapse in prices following the credit crunch that was the blip, not the price spike that preceded it. And what’s most frustrating now is the extent to which policymakers have frittered away the chance we had to get onto a more secure footing.

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Tumultuous times for the dollar this week. Gold has hit an all-time high three days in a row (this morning it’s at $1,045  troy ounce – it was only $990 on 29 September) while WTI oil is up at $71.50 a barrel todaycompared to $66 just over a week ago – both commodities head upwards when the greenback’s going the other way. So what was going on? Over to the NYT for the stocks and bonds report in Wednesday’s paper:

Investors clamored to buy pretty much anything on Tuesday — as long as it was not the dollar. A seven-month slide in the value of the dollar gained force as investors migrated to other markets and fretted over a report that crude oil could one day be priced in other currencies, hobbling the dollar’s role as a vehicle for global trade.

Whatever would give investors that idea, you wonder? Answer:

A report on Tuesday in The Independent, a British newspaper, suggested that China, France, Japan and Russia were in secret talks with Persian Gulf countries to abandon the dollar for international trade in oil and replace it with a basket of currencies and gold.

The Independent? Not the FT, not the WSJ, but the Independent? Yup, the FT’s Alphaville blog says so too:

The Independent appears to have rocked the world on Tuesday with its Robert Fisk exclusive exposing a secret plot by international central banks to topple the US dollar.

So what on earth did he say that managed to move markets on the other side of the Atlantic?

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Deutsche Bank have good news and bad news, as the Wall Street Journal’s excellent Environmental Capital blog recounts:

Here’s an intriguing thought: Global oil supplies are indeed set to peak within a few years, and no, that is not bullish for oil. Quite the contrary—it will spell the end of the “oil age.”

That’s the take from Deutsche Bank’s new report, “The Peak Oil Market.” In a nutshell: The oil industry chronically under invests in finding new supplies, exemplified both by Big Oil’s recent love of share buybacks and under-investment by big oil-producing nations. That spells a looming supply crunch.

That will send oil to $175 a barrel by 2016—and will simultaneously put the final nail in oil’s coffin and send prices plummeting back to $70 by 2030. That’s because there’s an even more important “peak” moment on the horizon: A global peak in oil demand. That has already begun in the world’s biggest oil-consuming nation, Deutsche Bank notes:

US demand is the key. It is the last market-priced, oil inefficient, major oil consumer. We believe Obama’s environmental agenda, the bankruptcy of the US auto industry, the war in Iraq, and global oil supply challenges have dovetailed to spell the end of the oil era.

The big driver? The coming-of-age of electric and hybrid vehicles, which promise massive fuel-economy gains for short-hop commuting but which so far have not been economic.

Deutsche Bank expects the electric car to become a truly “disruptive technology” which takes off around the world, sending demand for gasoline into an “inexorable and accelerating decline.”

Is a peak for global oil demand in sight, wonders the Guardian’s Data Blog this morning? Er, no – what might make them think that, you wonder? Answer: a new Greenpeace report called Shifting Sands, which argues that the case for developing tar sands in Canada is rapidly diminishing as oil demand falls.  The report pulls together demand forecasts from OPEC and IEA, and argues that on top of the effects of the recession,

“In the longer term, the impact of two key policy instruments adopted in the US and EU are cited as gaining in influence. These are the US Energy Independence and Security Act and the EU Climate and Energy package. These policies, and the fact that there has been a degree of  saturation in these markets, have led to the unanimous conclusion among these agencies that oil demand in the OECD has peaked.”

OECD, schm-OECD! They’re beside the point!  Let’s remind ourselves of what the last IEA Outlook report actually said:

Global primary demand for oil (excluding biofuels) rises by 1% per year on average [in the report's Reference Scenario], from 85 million barrels per day in 2007 to 106 mb/d in 2030 … all of the projected increase in world oil demand comes from non-OECD countries. 

It is entirely true to point out, as Greenpeace do, that investment in tar sands has fallen off a cliff as oil prices have crashed from $147 last July to their current level of around $60, and that investor uncertainty over future demand is the big driver here.

But to go from there to talking about a peak in world oil demand? I wish.

The last two weeks have seen a storm of insurgent activity in Nigeria: Shell’s onshore output has been halved to around 140,000 barrels a day, Chevron has lost about the same again (taking the aggregate output lost to over to a fifth of Nigeria’s total) – and for the first time Lagos has been attacked.  According to Africasia.com,

Fighters from the Movement for the Emancipation of the Niger Delta (MEND) attacked the facility, the first strike in Nigeria’s economic nerve centre since the oil insurgency was launched in 2006. Rescuers said five people were burnt beyond recognition in the blast.

“The militants went into open shooting with the naval officers guarding the facility but they were overpowered. They used dynamite to destroy the manifold,” said Geofrey Boukoru, a member of the emergency rescue team.

The militants arrived in four speed boats, exchanging fire sporadically with the navy for about three hours before hurling dynamite into the facility, said a senior official from the Pipelines and Products Marketing Company, an affiliate of the state-run petroleum corporation.

The Lagos attack took place just before the federal government’s planned amnesty release of Henry Okah, the head of MEND – a release that, in the event, still went ahead despite the attack.  MEND has since said in a statement that it “considers this release as a step towards genuine peace and prosperity if Nigeria is open to frank talks and deals sincerely with the root issues once and for all” – although as Abubakar Momoh of Lagos State University observes to AlJazeera, “What the government has done in the case of Okah is like treating the symptom and not curing the disease … there are issues that drove the militants to the trenches. Until those issues are resolved in a fair and just manner, there will never be peace in the Niger Delta.”

As David noted back in November last year, counter-insurgency expert John Robb has called Henry Okah ”one of the most important people alive today, a brilliant innovator in warfare”. Here’s Robb’s account of how Okah did it. (more…)

From a post here last October:

[We can expect] a reduction in commodity prices for the duration of the global downturn (however long that may be) as demand for them falls.  As I’ve mentioned, futures prices for grain crops are already falling; we can expect that trend to be supported by falling energy prices, which will reduce some of the pressure on food that’s come via fertiliser prices, transport costs and demand for crops as biofuels.

That said, let’s be clear: the fall in commodity prices due to a global downturn does not mean that we’re out of the woods for good on high food and fuel prices. As Javier Blas notes in the FT today, the downturn also means that necessary investment in increasing supply will be put off.  As soon as we’re out of the dowturn and demand starts going up again, we’ll discover that there’s been no shift in the underlying supply fundamentals – and hence that the stagflation drivers we were all worrying about until the credit crunch really began in earnest are just waiting where we left them.

Latest oil price data (Jul 08 – now, courtesy of BBC News):

Latest FAO Food Price Index:

Royal Dutch Shell - Flickr User Lee Otis

After 13 years, Royal Dutch Shell has agreed to pay $15.5 million compensation to settle a court case over its alleged part in the execution of Ken Saro-Wiwa and other Ogoni leaders in the Niger Delta. Much of the backstory can be found here.

Now I’m no judge (not yet, anyway), but $15 million doesn’t seem a lot for a firm with 2008 revenues of $458 billion. Michael Goldhaber, who does know something about law, describes the sum as ‘nuisance value’ from Shell’s point of view.

Yet the fact that Shell settled the day before the trial was due to begin is indicative of the firm’s distaste for either the publicity that court proceedings would create, or the culpability that might be uncovered. (more…)

Nobuo Tanaka, the executive director of the International Energy Agency, is quoted in the FT this morning as saying that “it would be in the interests of producers and consumers if oil stayed at its present level of about $45″.

This strikes me as a bit odd.  A whole range of senior oil industry figures has been warning that with prices having fallen off a cliff since last summer’s peak of $147, investment in new production capacity has fallen sharply as well – setting the stage for a potential supply crunch as soon as the world begins to emerge from the downturn and demand starts to pick up.

Nick Butler, for example, suggested in December that a price band of $50-$75 a barrel is needed to ensure that sufficient new investment comes on stream to meet demand (which the IEA projects will rise from 85m barrels a day in 2007 to 106m mb/d by 2030). Total CEO Christophe de Margerie, meanwhile, said in October last year that if the oil price fell to $60 a barrel and stayed there, “a lot of [new] projects would be delayed”.

Strangest of all, it’s less than a month since Nobuo Tanaka himself was briefing heavily about the risks of a future supply crunch resulting from under-investment, and stressing that he expected demand to rise by about 1 mb/d from next year onwards.

So what’s going on?

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If you missed Turki al-Faisal’s op-ed in the FT last week, then take a look.  Entitled “Saudi Arabia’s patience is running out”, the language of the former Saudi Ambassador to the UK and the US (and before that the long-time head of Saudi intelligence) is blunt.  For instance:

Unless the new US administration takes forceful steps to prevent any further suffering and slaughter of Palestinians, the peace process, the US-Saudi relationship and the stability of the region are at risk. Prince Saud Al-Faisal, Saudi foreign minister, told the UN Security Council that if there was no just settlement, “we will turn our backs on you” …

America is not innocent in this calamity. Not only has the Bush administration left a sickening legacy in the region, but it has also, through an arrogant attitude about the butchery in Gaza, contributed to the slaughter of innocents. If the US wants to continue playing a leadership role in the Middle East and keep its strategic alliances intact – especially its “special relationship” with Saudi Arabia – it will have to revise drastically its policies vis a vis Israel and Palestine.

Think that’s strong?  Try this:

Last week, President Mahmoud Ahmadi-Nejad of Iran wrote a letter to King Abdullah, explicitly recognising Saudi Arabia as the leader of the Arab and Muslim worlds and calling on him to take a more confrontational role over “this obvious atrocity and killing of your own children” in Gaza. The communiqué is significant because the de facto recognition of the kingdom’s primacy from one of its most ardent foes reveals the extent that the war has united an entire region, both Shia and Sunni. Further, Mr Ahmadi-Nejad’s call for Saudi Arabia to lead a jihad against Israel would, if pursued, create unprecedented chaos and bloodshed. So far, the kingdom has resisted these calls, but every day this restraint becomes more difficult to maintain …

Today, every Saudi is a Gazan, and we remember well the words of our late King Faisal: “I hope you will forgive my outpouring of emotions, but when I think that our Holy Mosque in Jerusalem is being invaded and desecrated, I ask God that if I am unable to undertake Holy Jihad, then I should not live a moment more.”

The FT followed Turki’s article up with a leader yesterday, observing that:

Anyone with a stake in the stability of the wider Middle East should take very seriously the warning set forth in the Financial Times last Friday by Prince Turki al-Faisal … The Saudis have emitted a crescendo of warnings, as Arab leaders over the past decade have lost faith in American leadership and signalled they may make their own arrangements: hostile to Israel, in detente with Iran, and turning their backs on the US – unless it can restrain its Israeli ally. 

Pretty sobering.  Also worth checking out this analysis from a retired US foreign service officer who was twice posted to Sauid Arabia.

As oil continues its crazy gyrations (yesterday’s price – $48), news is proliferating that investment in new exploration and production is falling off a cliff.  Monday’s NYT, for example, had this:

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.

Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.

The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.

Now for Dan Drezner, all this poses a question:

So, let me see if I have this right:

If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;

If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because… energy prices are low.

Well, actually that is more or less the long and the short of it; as I argued back in July, the oil price is set to continue its recent yo-yoing for as long as we continue without a clear ’signal from the future’ about the long term demand outlook for oil. After all, if you were an investor considering ploughing money into oil fields that were only profitable above $60 or $70 a barrel, and which would take many years to recoup the capital cost, wouldn’t you apply a pretty big risk premium if you saw prices collapsing to below $50 from a high of $147 less than six months earlier, with the potential in the background for future climate policy to cause demand to plummet?

Problem is, though, that without that new investment, we’re on track for a serious price crunch at some stage, as both the IEA and Chatham House have argued.  So how to square the circle?  Well, Nick Butler – who was John Browne’s chief of staff at BP and now heads the chairman of the Centre for Energy Studies at Cambridge’s Judge Business School -has a proposal in the FT yesterday. He writes:

If the energy ministers want to stabilise the market they should begin by commissioning a detailed, independent analysis of what went wrong. They should then develop the stabilising mechanisms that would limit the possibility of any repetition of 2008.

The most effective mechanism would be agreement on a broad target range for prices – say, between $50 and $75 a barrel – backed by a strategic stock holding to be augmented or deployed when prices diverged from the range. To support such an agreement trading would be limited to those with a direct physical interest in the market.

From a new base of relative stability ministers could consider the longer-term issues that will shape the energy market: the huge need for infrastructure investment ($350bn a year according to the International Energy Agency) and climate change.

This idea of a price band is clearly starting to gain ground in the energy think tank world – I heard a very similar idea mooted by an attendee at a Shell / Economist energy breakfast in London last month. But I’m not so sure.  While Nick Butler’s clearly right to refer to the need to integrate energy security with climate change, why not go one step further – and use a comprehensive climate framework to provide the long term oil price stability that’s needed to bring the right amount of new investment on stream?

Think about it.  Imagine a climate regime in which the emission targets are sufficiently long term (i.e. multi-decade rather than in 5-yearly increments as under Kyoto), and which is based on a quantified stabilisation target, which therefore means that all major emitters have binding caps. (You can argue about political feasibility in the current political climate, but the fact remains that a global deal on climate that actually solves the problem will have to satisfy these conditions anyway – and sooner rather than later if we’re to limit warming to two degrees C.)

What such a regime would also achieve, with no extra work needed, is to provide long term predictability on how much fossil fuel will be being consumed – for decades ahead.  True, it wouldn’t tell you exactly which fossil fuels – coal versus oil, for instance – but since they’re used in different markets (oil mainly for transport, coal and gas mainly for power generation and heat), you could make a pretty good guess.

And now imagine again that you’re the potential energy investor we met earlier.  All of a sudden, you can invest with much more confidence – and what’s more, knowing the level of demand will enable you to watch what other investors are doing too, so that more or less the right amount of new oil is brought on stream to meet projected demand, within the context of a global deal for climate.

Oh, and there’s one other advantage: given that a global deal on emissions is primarily an agreement between energy consumers, you can worry just a little bit less about OPEC’s congenital inability to stop itself from cheating…

Update: meanwhile, “OPEC oil ministers meet on Wednesday to remove a record 2 million barrels per day from oil markets as they race to balance supply with the world’s collapsing demand for fuel … Saudi Arabia, the world’s biggest oil exporter, has led by example — reducing supplies to customers even before a cut has been agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as “fair.”"

The question of OPEC’s reserves looms large in the latest World Energy Outlook.  A small excerpt (with emphasis added):

The world’s total endowment of oil is large enough to support the projected rise in production beyond 2030 … Estimates of remaining proven reserves of oil and natural gas liquids range from about 1.2 to 1.3 trillion barrels (including about 0.2 trillion barrels of non-conventional oil).  They have almost doubled since 1980.  This is enough to supply the world with oil for over 40 years at current rates of consumption. Though most of the increase in reserves has come from revisions made in the 1980s in OPEC countries rather than new discoveries, modest increases have continued since 1990, despite rising consumption.

Sounds like quite a lot rides on the accuracy of those reserves estimates.  But the oil industry is a high tech business, and only a total cynic would suggest that OPEC members would inflate their reserve estimates so as to increase their production quotas - so we can trust the data, right? 

Over to Carola Hoyos and Javier Blas in the FT this morning:

When the Opec oil cartel meets in Cairo tomorrow, some of its most powerful members will argue that the key action the group must take is to keep strictly to the 1.5m barrel a day cuts that it has already announced.

Verifying whether Opec’s countries do just that is far from simple. Knowing how much each country produces is mired in politically motivated dishonesty, secrecy and, in many cases, incompetence.

The most reliable data, used even by Opec countries themselves, come not from the cartel member’s energy ministries, but from … a network of spies watching, binoculars in hand, the movement of tankers in and out of the world’s biggest export terminals.