Not Your Father’s Oil Crisis
How globalization sets the current problems apart from the oil shocks of the 70s
Not only does this phenomenon allow oil produced in Alberta to be sold overseas, it also enables, for instance, an Edmonton store clerk to use a computer made in China to connect to the Internet to buy stock in a Calgary-based oil company that drills in Argentina with a rig employing skilled Venezuelan laborers to produce oil sold on the New York Mercantile exchange for consumers in India.
Globalization helped Alberta’s old oil patch evolve into the robust, multibillion-dollar industry it is today. The free flow of technologies, information, and investment capital across international boundaries were essential in its early years and help sustain its growth today. Companies can attract investors on international markets. Alberta industry employers can address labor shortages by bringing in skilled workers from as far away as Atlantic Canada, Mexico or Venezuela.
Arguably, the international economy of the 21st century is built on the back of globalization and abundant supplies of relatively cheap energy. China’s competitive advantage in cheap labor for manufacturing, for example, is sustained by the ability to use oil-fueled transportation of raw materials and finished products to and from its shores. Alberta consumers benefit from cheaper prices and more goods.
But over the past generation, low petroleum prices helped foster a sense of complacency about energy consumption and stifled innovation. With cheap world crude prices and growing economies, consumers continued to use oil prodigiously.
Meanwhile, for multinational oil companies, globalization presented different challenges. Given that companies were now competing for investment dollars on the international market against other industries, oil firms adapted their practices to new realities. Instead of reinvesting profits in exploration or upgrading infrastructure, companies kept their investors happy by offering dividends even as global demand increased. The cumulative effect of thousands of incremental decisions just like this eroded whatever elasticity existed in the world petroleum market in the 1990s.
Today global production equals global consumption – roughly 85 million barrels per day. The tight supply and demand equation soon manifested itself in world prices as nations and economies began competing aggressively to secure adequate supplies of energy to continue fueling their economies. The result was a dramatic rise in world oil prices to over $150 a barrel earlier this summer and dire predictions it might reach as high as $200 before the end of the year. Every day, consumers are spending $6 billion to $7 billion more for oil than they were one year ago.
For producing nations and multinational oil companies, rising prices represented a financial windfall. The Alberta government recently revised its expected surplus for this year to $8.5 billion, in part due to high energy prices. ExxonMobil, the world’s largest publicly traded oil company, posted record profits of $40.6 billion in 2007 and recently announced an increase in its second-quarter income for 2008 of 14 per cent – to approximately $11.68 billion.
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