Speaking at Baker Institute, expert attributes high energy prices to rising demand, subsidies

Speaking at Baker Institute, expert attributes high energy prices to rising demand, subsidies

BY FRANZ BROTZEN
Rice News staff

A leading energy analyst told an audience at the James A. Baker III Institute for Public Policy June 24 that the recent climb in oil prices is due mostly to supply and demand. Mark Finley, BP America’s general manager for global energy markets, placed much of the blame for higher demand on rising imports by the developing world, enhanced by government subsidies.

“All of the net growth in global oil consumption last year came from countries that subsidize consumers,” Finley said.

	COURTESY PHOTO
	Mark Finley, BP America’s general manager for global energy markets, presented BP’s 57th annual Statistical Review of World Energy, a widely respected and authoritative publication in the field of energy economics that is used for reference by the media, academia, world governments and energy companies.

Finley presented BP’s 57th annual Statistical Review of World Energy, a widely respected and authoritative publication in the field of energy economics that is used for reference by the media, academia, world governments and energy companies. A new edition is published every June.

The event was hosted by the Baker Institute Energy Forum and the Houston chapter of the United States Association for Energy Economics.

The survey included data on the five main sources of global energy: oil, natural gas, coal, nuclear power and hydroelectricity. Finley spent most of his presentation on oil, which accounts for 35 percent of the world’s energy supply. “This is the first time in the history of the oil industry that prices have gone up for six years in a row,” he said, noting that the price of oil was about $12 a barrel 10 years ago. The price topped $140 a barrel at the end of June.

Global energy consumption grew by 2.4 percent in 2007, according to the BP study. That represents a decline from a 2.7 percent growth rate the previous year. Since 2001, as prices have risen, growth in energy consumption has slowed significantly, Finley said.

The trend actually has two divergent facets, Finley argued. In the industrialized world, which roughly correlates to the Organisation for Economic Co-operation and Development (OECD), growth in oil consumption fell by 400,000 barrels in 2007, while in countries outside the OECD, oil consumption accelerated.

As might be expected, oil-producing nations increased their consumption last year. But perhaps surprisingly, oil-importing countries also increased their consumption — despite the dramatically higher prices.

Part of the developing nations’ thirst for oil comes from the strength of their economies. “To a degree that we have not seen before in economic history,” Finley said, “countries outside of the OECD are becoming significant drivers of global economic growth.” But the energy-intensive form of economic growth found in many parts of the world is exacerbated by subsidized energy, he added, even in countries that must import expensive fuel.

Finley discounted recent claims that blame speculators for higher energy prices. “Our view is that … a predominant share of the increase in prices that we’ve seen in recent years can be explained by tightening fundamentals and by changes in perceptions about future fundamentals,” he said. “Largely, these futures markets reflect underlying pressures rather than create them.”

The rise in energy prices has not taken place in a vacuum. Commodity prices in general have been going up, part of what Finley called a “synchronized commodity cycle.” But the fact remains, Finley said, that today’s oil prices have hit an all-time, inflation-adjusted high.

Also speaking at the event was Amy Myers Jaffe, the Wallace S. Wilson Fellow in Energy Studies at the Baker Institute. She said the latest round of price rises had begun to puncture several myths about the energy market. One common belief she mentioned was that Americans will continue to drive at the same rate regardless of how high fuel prices go. But over the last two years, Jaffe noted, miles per vehicle driven have dropped, “and we expect that trend to continue.”

Similarly, many observers have argued that China’s oil consumption is immune to high prices, Jaffe said. But several indicators show Chinese demand is beginning to fall off as world prices have doubled.

Addressing the ongoing debate over “peak oil,” Finley said, “The world is not running out of oil.” He pointed to a graph showing growing worldwide reserves. Geology is not the problem, he concluded. Rather, surging demand in some parts of the world, combined with constrained supply (due to a variety of factors, including OPEC production cuts last year and declining Russian exports) that lowered petroleum inventories, is the reason consumers are facing the highest energy prices in history.

The BP annual review is available online at http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622.