How Big Oil got bigger – and befuddled the pundits

In September 2005, prices rose above $60 a barrel after Hurricane Katrina damaged oil production facilities in the US. The market increased again to $66 a barrel in January 2006 as a result of violence in Nigeria and Iran’s conflict with the west, before reaching a new peak in August when oil rose to $75 a barrel after Israel invaded Lebanon. Over the past 12 months the price of oil has almost doubled to nearly $120.

Different reasons have been put forward to explain the rises – from tensions between Washington and Iran, worries about “peak oil”, insufficient refinery capacity and under-production by Opec. Certainly, many hedge funds have turned to commodities as equity values have slumped and financial buyers are purchasing crude as a hedge against further falls in the dollar.
The new world of $100-plus oil has encouraged all the big companies to raise the level at which they are prepared to invest in new oilfields and prompted them to re-examine areas previously considered too expensive given the likely size of any find – such as the North Sea. Canada’s tar sands – where oil is extracted in an energy-intensive way – has seen a new Klondyke rush with Shell and BP both moving in.

Similarly, oil companies have started to talk openly about the potential that exists beneath the Arctic, despite pressure from environmental groups. The western oil companies have found host nations such as Venezuela and Russia gradually seizing back assets while state-owned oil groups from China and India prowl the world for new supplies.

The growth in the need for oil – particularly in China and India – has led to shortages of rigs and drilling staff. Inflation might have remained relatively muted so far, but costs in the oil sector are surging at 15% a year in some areas. The boom has extended to the service companies that provide all the equipment needed by the oil groups. Having been at the sharp end of downward cost pressures from the larger oil and gas firms in the 1990s, which saw some driven out of business, they have found themselves in the driving seat as demand escalated dramatically.

Guardian