– What does this mean for Guyana within the framework of the Production Sharing Agreement between the Government of Guyana and the multinational oil company?
With a rapidly changing global environment — especially with the globally growing recognition given the need for advancement of climate change policies underpinning the notion that crude oil is losing its value – a trend is emerging that would certainly continue to gain momentum in the foreseeable future. In recent decades, crude was often referred to as ‘black gold’ because it was a commodity known to carry high value on global markets. The highest price was recorded in the last decade – in 2008 – at US$140 per barrel.
Unfortunately, this commodity may never ever reach such high prices again. In fact, it may never again reach US$100 per barrel. It is this new global phenomenon that this article addresses; and by its end, readers should have a greater understanding and appreciation of the divergent factors contributing to this new dimension in global oil economics.
The international crude oil market is the source of the primary feedstock that creates refined petroleum products produced in oil refineries across the world. Global production and consumption have been increasing, and more than 80 million barrels of crude oil are produced each day, according to IEA statistics for 2013. Notwithstanding this, with the emergence of shale oil, coupled with growing concerns about climate change and the environment, the traditional beliefs that were in the past upheld to analyze the oil market are outdated. A new toolkit is needed, together with a new set of principles to guide the analyses of the oil market. Oil is not likely to be exhausted; therefore, there should not be a presumption that the relative price for oil will necessarily increase over time. A key factor governing the future price of oil is whether the standardized, repeated, “manufacturing-like” processes characterizing shale production, with the associated rapid gains in productivity, would spread to other types of production (Dale, 2015).
The supply characteristics of shale oil are different from conventional oil: shale oil is more responsive to oil prices, which should act to dampen price volatility. But it is also more dependent on the banking and financial system, increasing the exposure of the oil market to financial shocks. The Organization of Petroleum Exporting Countries (OPEC) is a central force in the oil market with respect to one of its key roles in seeking to stabilize oil prices. However, when analyzing its ability to do so (stabilize the oil market), it is important to consider the nature of the shock driving the change in oil prices, and in particular, whether it is a temporary or persistent factor (Dale, 2015).
The future of energy
Energy is a fundamental input for economic systems. Current economic activity depends overwhelmingly on fossil fuels, including oil, coal, and natural gas. These fuels are non-renewable. Renewable sources such as hydroelectric, wind, and solar power currently provide less than 10% of global energy. The speed of the transition to renewable sources would be highly influenced by policy choices. Potential policies include increasing energy research and development expenditure, feed-in tariffs, and renewable energy targets.
Public policy can also aid in providing capital for renewable energy projects, and in providing a robust electricity grid for moving energy long distances (Timmons et.al, 2014).
With higher energy costs, buildings, transportation networks and manufacturing would be redesigned to use less energy. Thus a large portion of the transition to renewable energy would likely be accomplished not by providing new sources, but rather by redesigning systems to consume less energy. An eventual transition to renewable energy is unavoidable, so the question is how to best manage it, minimizing total cost of energy services plus cost of damages caused by energy utilization. A combination of conservation and renewable energy sources will eventually replace the current fossil fuel-dominated energy system. Therefore, addressing climate change suggests that this needs to happen sooner rather than later (Timmons et.al, 2014).
There are currently huge developments taking place rather rapidly by a number of countries around the world. The leaders among them, according to the World Economic Forum, are China, India and the U.S.A – to the extent where: (1) Morocco is building a solar power farm as big as Paris. The country wants to be a major supplier of solar energy, and its solar power industry is growing rapidly. Morocco will also more than quadruple its solar power by the end of 2018. (This discussion and analysis will be continued next week, when the final article to conclude this topic is published).
*The Author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.
