Each day, more oil is discovered and the earth seems to spew more of the stuff, mocking the peak oil pundits and adding to the anxieties of climate change watchers.
However, increasing supply through conven- tional and unconventional sources does not suggest that those who do not have the resource will be free of future uncertainty as far as supply security, price volatility and balance of payment issues go. Those who have lots of it should consider themselves lucky. Perhaps, they can control the world and reshape global geopolitics.
Those who do not have oil are at the mercy of the resource holders and will have to find ways to reduce their dependence despite the abundance of supply. As supply moves from abundance to scarcity – for whatever reason – independence or higher degrees of independence are a ‘safer life than insecurity’.
Oil will continue to have systemic ramifications for South Africa and the future cost of living, as the price of oil has economywide inflationary effects. Inflationary effects are discursive: from direct fuel costs through to indirect costs, such as food price inflation and other price rises as oil pricing percolates through various sectors of the economy.
Nearly 95% of our foreign crude oil requirements are met through imports. Crude oil also represents the single largest item on the country’s import account. Rising prices over the last few years and increased demand imply that oil is becoming a scarce commodity – if you do not own the resource yourself – and the impacts on the economy are becoming severe.
Heavy dependence on foreign oil imports also means that there is a need for better coordination of exports of products and services from tradable sectors so that the required foreign currency reserves are available to pay for these oil imports and other goods. A decline in exports only places more pressure on the current account to pay for the oil imports.
The value of the country’s oil imports trebled between 2000 and 2010. Crude oil prices are likely to remain volatile and to be high in future owing to global geopolitical issues as well as rising demand. Therefore, continued high levels of crude oil consumption will make the country vulnerable to high oil price shocks and will result in a high oil import bill. Recent opinion suggests that, despite increased discoveries of oil, the rate of replacement is not sufficient to meet future global demand and ensure stability of supply for at least 90 years.
The current global oil supply is estimated to be about 1.65-trillion barrels, which translates into 54 years of supply. However, global shortages of oil could easily reach 18 years if adjusted for population growth and nominal increases in per capita consumption. If these predictions are true, even slightly more optimistic scenarios will not suggest that oil will be cheaper nor less volatile in terms of supply and pricing.
There is another factor that is adding to the availability and volatility of fossil fuels globally – and that could have implications for South Africa’s own energy security in the future. Since most oil reserves reside in the Middle East and given that 70% of the world’s oil is owned by national governments, the true state of global oil reserves often suffers as a result of information asymmetry.
We simply do not know whether our reserve estimates are accurate or overstated. In addi- tion, there is a growing tendency for strategic commodities capture by emerging and dominant resource-hungry economies. This is emerging, for instance, with phosphates and rare earths.
This trend is likely to lead to some gaming with regard to production (especially in the case of oil and gas) in order to ‘manipulate’ supply and prices in the future. Increased demand may be seen as a chance to increase a reve- nue stream from a depleting resource by resource holders who would be more concerned about their interests than those of resource buyers.
But it is also true that rising prices incentivises independent producers to open up new oil-, gas- or coalfields, and this would change the nature of supply and demand.
Investment in new stranded sources largely depends on price and predictability of demand. It is possible that investments can lag growing demand, creating artificial scarcity. What is clear is that uncertainty rules and throws into disarray long-term investment choices in fossil-fuel-dependent power generation.
Strategic management and coordination of fossil fuel energy sources become ever more vital, putting strain on policymaking and stretched State coffers and agencies that are both responsible for energy and dependent on energy.
Oil uncertainty forces many national gov- ernments to make tough strategic choices between dependence and independence. However, dependence heightens the level of effort in coordination, breaking information asymmetries and jockeying against other resource-hungry powers for the best long-term deals. The dependence on imports requires effective State machinery that manages both the internal and external dynamics unleashed when everybody is seeking to grab as much oil as possible for themselves.