Undoubtedly energy is connected with economic life, where energy producers always look at global economy to measure wealth growth that is why we concentrate on economic cycle and its effects on all sectors, specifically crude oil as a vital source of energy
Economic activities pass through fluctuating phases, economists and financial analysts do their effort to diagnose and analyze each phase and try to find suitable solutions for any coming problem. But, what causes problems?
Business conditions rarely stand still, because business fluctuations are irregular, they so called cycles, any business cycle may take decade to continue, which we do not like in case of crisis.
Starting with recession, when production declines for two or more consecutive quarters, business profits drop and unemployment rises. The increase in unemployment lags behind the output changes, as most business is reluctant to layoff personnel. At this phase, governments inject large funds in markets to pop up economic activity. The recession always ends with trough, that is the period when economic activity is at its lowest. This is followed by the expansion phase, where output increases; profits, employment, wages, prices and interest rates generally rise. Historically, we reach the peak when everything goes up including investments, prices, output, employment, wages and interest rates, the community is then in prosperity.
Roots of the current global crisis
The current financial crisis goes back to the early days of 2008, specifically in the U.S. It firstly hit major banks; Lehman brothers, bank of America (lately merged with Meryl Lynch), AIG, then extended to include money markets and a little collapse of Wall Street. The last effect stretched to automakers, the main vital activity for the U.S. economy. The European countries came second in being affected, followed by the Asian countries (Japan, China, S.K.)
Once Lehman brothers declared bankrupt, the government initiated a rescue plan. The bailout plan secured up to $ 700 billion, but the attributes of bailout are not clear. There were two arguments; supporters agreed on this bailout and critics claiming that these organizations will get loans from government (originally money of taxpayers) and when they gain profits, they will put it in their sole pockets. Till this moment, rescue plan does not show which agreement is right.
The U.S. Congress has presented two options, to give loans with low interest rate and inject cash in banks and companies or to share in capital of banks with certain percentage to be agreed upon. The two alternatives faced rejection, but the discussion is still open.
Petroleum Sector… between a rock and hard place
Economic experts watch carefully the speculation between consumers and producers of crude oil. Producers believe that with a production cut, prices will increase based on the traditional economic theory, on the other side, consumers believe that producers are greedy and they have to wait for the repercussion of 2009.
ExxonMobil findings
*Growing population and expanding economies leads to increase of global energy demand by an average of 1.2% per year between 2005-2030. Global demand is expected to increase 35%, from the equivalent of 229 million bpd in 2005 to 310 million bpd in 2030. This forecast is derived from 2007 outlook which projects 1.3% average annual growth rate
*Oil, gas and coal will continue to provide the vast majority of the worlds energy needs close to 80% of global demand until 2030 due to their abundance and availability. Nuclear energy will grow as emphasis on low-carbon fuels increases. Renewable fuels, such as wind, solar and bio-energy will also grow rapidly.
*Transportation is expected to grow substantially. From 2005 to 2030, demand in developed countries is expected to be stable, as increases in the number of vehicles are offset by efficiency improvements. In contrast, demand in developing countries is likely to more than double as economies grow and prosperity enables increase in personal vehicles.
*Global carbon-dioxide emissions are projected to rise by close to 30% between 2005-2030 even with improved energy efficiency and growth in nuclear and renewable energy sources. While carbon-dioxide emissions are expected to decline in the U.S. and Europe, these declines will be more than offset by larger increases in developing countries. For example, by 2030,China is expected to have CO2 emissions comparable to the U.S. and Europe combined. This means we must invest in the production of existing fuel sources, develop new sources of energy and create new technology that will reduce the environmental footprint of energy production and use.
Move towards renewables
The financial crisis has led big countries to use other alternatives than crude oil, for instance, produce electricity from renewable energy sources (through wave power, exploiting the differences in ocean temperature), bio-energy, solar power. Nowadays, conferences are being held to find suitable sources for electricity to be used in large organizations.
California Center For Sustainable Energy stressed on solar energy, for instance, the city of San Diego is in the process of procuring five megawatts of solar electricity in municipal sites over the next five years. Also, the auto industry will couple their first mass-market electric cars, with the hope of making the new generation of vehicles. General Motors is already coordinating with industry partners, community leaders, and utilities to ensure that the strong demand for the Chev Volt –due in November 2010- will have the infrastructure to back it up. Nissan and Mitsubishi are testing fast charging infrastructure with seven Japanese utilities capable of replenishing battery charge to 80% in 30 minutes.
The conflict that apparently occurs between producers and consumers of oil will enhance big countries with ambitious plans to turn to renewable energy and nuclear energy. But on technical level, the standards and protocols for charging electric cars as a whole are not settled where auto makers are waiting for guidelines from Society Of Automotive Engineers International on fast –charging methods, which can make difference in charge time.
Conflict and speculation
The glimpses of year 2009, bears festering problems: retard economic growth, credit crunch, capital shrinking, retreating money markets, supply more than demand in crude oil markets, close up factories, layoff workers…etc.
Oil producers are trying to speculate and stabilize oil prices through gradual production cut, but consumers are still stagnant, Saudi Arabia leads OPEC to have satisfied prices ranging between $75-90 per barrel. Oil producers outside OPEC did not comment on resolution of cut production. But will oil producers fulfill their promises or behave individually?
Developing countries situation
Waterfalls always hit closer individual, no matter how far you are, the chock becomes less effect, and skilled swimmer can deal with. Developing countries seize the chance to re-engineer its ambitious plans of growth. Imports bill will decline and cash flow shrinks, in addition, foreign investment can be attracted in these countries since they are characterized by their cheap workforce and less expensive production tools. They can benefit from the fall of oil prices to prioritize their requirements and focus on diversifying sources of energy at less cost without environmental pollution.
By Mostafa Mabrouk
Economic Consultant, Ganope
