Many people did not believe Goldman Sachs' prediction last March that oil prices would increase to over US $50 per barrel, continuously rising until it reached US$ 105 per barrel by 2007. But now that oil prices already exceed $US 70 dollars per barrel, it would appear that the era of cheap oil has gone forever. Who is to blame for the rise in oil price? When will the price reach over US$ 100 dollars and how does China solve its oil problem?

The Shanghai based Xinmin Evening published an article recently and gave some analysis into these questions.

US$ 100 per barrel for the next generation

Goldman Sachs warned again this year that if there is a halt in oil production by any major oil supplier, the oil price could escalate to US$ 105 per barrel at the very least. Analysts believe that the oil price will continue to rise because of a diminishing supply of low cost oil resulting in increasingly high marginal costs of crude oil production. Apart from OPEC, only Russia has produced more crude oil in recent years while other countries have seen very slow increases. They predict that the effective surplus capacity is almost at zero.

Meanwhile, the International Energy Agency warns that if Saudi Arabia doesn't increase investment to expand its production capacity, by 2030 international oil price will have easily risen to over US$ 100 per barrel, 50% more than the present price.

When will we experience such high prices?

People are more than aware of the present price inflation, however the question remains when will we experience such high prices?

In July 2004 when the oil price increased to US$ 40 per barrel, many people thought that the price would fall to half its level. When prices soared to US$ 50, people were still hoping the oil bubble would burst. However, in September 2005 when the price jumped to US$ 70, people seemed at least to be psychologically prepared for a US$ 100 breakthrough. Judging from experiences over the past 40 years, the price breakthrough will be within 20 years, our next generation will surely face these greater pressures from the rise in oil price.

Currently, Venezuela has the lowest priced oil at 3.2 pence per liter while Nigeria has the second lowest at US$ 0.1 per liter followed by Egypt, Kuwait and Saudi Arabia. The Dutch face the highest oil prices at US$ 1.75 US per liter followed by Norway, Italy, Denmark and Belgium. The US petrol price is currently around US$ 0.75 per liter.

Who is to blame for the rise in oil price?

There are two sources behind the rises in world oil price: the oil suppliers and developed countries including the US. Wealthy oil suppliers controlling the production quantity produce according to the price while wealthy developed countries simply want to accumulate more oil.

The world economy is experiencing unfavorable effects from the oil supply and high price. Such problems are greatly linked to the slowdown in oil supply and increasing demand, and are somewhat controlled by these two main sources.

Insufficient investment in oil

Wanting to maintain as much as possible of their present earnings from oil, many oil giants have invested little on further exploring and extracting oil; however suppliers are still apprehensive about an oil price crash due to over-supply and do not therefore want to invest more. Many large oil suppliers are mainly state-controlled companies and do not have the funds for further investment in increasing production.

Among large suppliers in Saudi Arabia, Iran, Iraq, Russia and Venezuela, only Saudi Arabia has started to invest more in oil supply expansion. Russia has also increased its production in recent years, but now the increase is also slowing down. Iran has maintained the same level, but production in Iraq and Venezuela are both diminishing.

The US stores more oil

As the largest oil consumer, the US still uses much of the world's oil resources. Since the mid 1970s, Europe and Japan have maintained a stable demand of oil while US demand has doubled. India consumes 2.5 million barrels a day while Americans consume ten times the amount. Despite being a high oil consumer, US oil import prices are only half of that of Europe and Japan, which may encourage further consumption by Americans.

Analysts also claim that by spending a lot of money on crude oil storage, ��Uncle Sam' may also have fueled the price rise. According to a US Energy Agency report last week, the US petrol storage has increased by one million to 210.3 million barrels while crude oil storage has increased by 1.1 million to 3.466 million barrels. If the world oil market receives a signal for lower and more stable oil demand by the US, the oil price would surely be contained.

What about China?

While the rest of the world experiences difficulties, China is no exception. Chinese drivers have already experienced problems. The Chinese must spend more on oil since petrol prices are almost the same as in America despite income per capita being ten times less.

Since 1993, China has become a net oil importer. Last year, China imported 136 million tons of oil due to severe shortage of the resource. China's oil and natural gas resource storage is just 11.1 % and 4.3% of the world average respectively.

It is predicted that between 2010 and 2020, China's oil demand will reach 340 million and 484 million tons respectively, China can supply 195 million and 184 million tons itself, but the rest will depend on imports.

China's current oil production is less than 4.5% of the world total, but the consumption ranks second to the US. China lacks necessary strategic oil storage capacity and is vulnerable in dealing with the sudden stop of oil supply or large scale fluctuation of oil price.

Building a resource-efficient society and widening channels of import

China is determined to build a resource-efficient society by transforming its mode of production and consuming less energy. This will be conducive to alleviating the impact of the oil crisis.

Meanwhile, China has looked around at oil pipelines in surrounding countries. Japan has also tried to obtain more oil from Russia in order to avoid the risk of relying too heavily on too few import channels. China's failure to buy Unocal Corporation suggests that oil has become precious to economic development in various countries and become a strategic resource.

Experts maintain that China should expand its channel of oil imports. On May 25th, China and Khazakstan's oil pipeline was formally under operation. It symbolized that for the first time, China has imported crude oil through a pipeline, implying great progress in using different channels to import oil. This pipeline not only provides secure oil import channels for China, but also provides a stable oil export market for Khazakstan. China hopes to import crude oil from many more different countries in order to avoid risks.

By People's Daily Online