Peak oil group ASPO is not impressed with a recent Newsweek cover story ‘Cheap oil forever: Why prices will keep falling’. The author, Ruchir Sharma, is head of emerging markets at Morgan Stanley Investment Management. He argues that historically commodity prices have continued to fall, despite rising demand, because technology for extraction or production improves. He also points out that above a certain price level, substitution and efficiencies kick in, creating an effective ceiling for sustainable oil prices.
China suffers from an over investment problem. It has been investing at a rate equal to 40 percent of GDP for nearly a decade, a level unprecedented in the history of economic development. Much of the money goes to export industries, which are sagging in the global downturn. Investment demand is not likely to revive soon, nor should it. China contributes 10 percent of global economic output, but has been consuming 25 to 50 percent of most industrial commodities, a pace that can’t be sustained. The pace should slow in coming years, as China moves to reduce its reliance on exports and investment, and to build an economy driven by local consumers. Beijing is also working to create more-efficient factories that run on less energy and require fewer raw materials. Meanwhile, in nations other than China, demand for commodities is falling at an annual rate of 30 to 60 percent, which will put intense downward pressure on prices.
Peakoil.net is annoyed at his argument (and his use of an Arthur Miller quote) . ASPO president Kjell Aleklett writes:
As I began to read the article I was struck by the thought, ”I have heard this before” and a memory of the cover of the Economist from March 1999 with the headline, ”Drowning in Oil” forced its way into my consciousness. That was ten years ago when we consumed 27.6 billion barrels per year. Back then, the flow of cheap oil was meant to grow and prices were to drop by half from $10 per barrel. Of course, the oil continued to flow and last year we consumed 31.2 billion barrels. But it was not $5 per barrel that we paid or even $50. Instead, we approached $150 per barrel when the market crashed.
In the short term, Sharma he has a point: the IMF’s latest World Economic Outlook, published today, forecast that commodities prices would be ‘subdued‘ for the remainder of 2009, and that oil prices were likely to stabilise around $50 a barrel and “rise moderately during the second half of 2009″.
Update 1: Gregor points out the Newsweek oil cover only appeared in international (non-US) editions.
Update 2: The IMF segue was a bit clumsy but we subsequently discovered another relevant observation: “Over very long horizons, prices for many commodities have declined relative to those of manufactures and services,” it notes. But adds: “Oil is the main
exception to the rule of decline—reflecting an oligopolistic supply structure, concentrated
reserves, and luxury characteristics (car ownership is a key driver of consumption).” Page 47, if you’re interested.