Editorial comment
For ‘energy security’ one could just as easily substitute ‘food security’ or perhaps instead of ‘peak oil’ then ‘peak food’. Despite their obvious differences, these industries actually share, in terms of supply and demand, many similarities and like the oil and gas industry, the world’s food supply mechanism is in a state of turmoil. At a fundamental level, yields of key crops such as wheat, rice, soya etc. are rising at a slower rate than the world’s population.
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In order to meet projected food requirements for 2050, when it is anticipated global population figures will have risen from the 7 billion of today to 9 billion people, analysts predict that production will have to increase by 70%. This will not be achieved easily, especially with a diminishing supply of previously unfarmed land, the ever present challenge of finding sufficient clean water in many regions and the rising cost of nitrogen fertilisers.
In the short term the picture is just as dire with droughts, or conversely floods, in the world’s key grain producing nations creating price spikes across international markets. It is no coincidence that spiralling food prices are one of the key drivers behind the civil unrest currently spreading across large parts of the Middle East. It is ironic, therefore, that these uprisings have inevitably led to a corresponding hike in oil prices that will in turn put further inflationary pressure on food prices.
For the oil and gas industry, the picture is equally tumultuous, with geopolitical risk very much back on the oil price radar. The Middle East is responsible for approximately 40% of global oil supply. Any disturbance to this supply is of extreme significance to the global economy. Whilst OPEC, and Saudi Arabia in particular, have promised to make up any shortfall in global supply caused by the current difficulties in the region, there seems to have been no hurry to implement this commitment to date. As a result, the price of crude had risen sharply to US$ 115, at the time of writing, with little sign of abating. Indeed, the outages of Libya’s light, sweet crude cannot easily be replaced in the market, especially by the heavier more sulfurous Saudi crudes, creating a major headache for European refiners.
In reality though, the current bump in oil prices is much more about speculation and a short term market reaction to the unrest in the Middle East rather than any actual demand shock. For the time being, the market remains well supplied and barring a significant escalation of the troubles across the region, oil prices will in time return to their pre-crisis levels. However, if nothing else, this series of events and the corresponding rapid price escalation should be a stark reminder that like global food supply, there are significant and fundamental flaws in the security and availability of global oil and gas supplies that will only become more apparent and more frequently witnessed in the years, if not months, ahead as a wave of increased demand from Asia’s burgeoning emerging economies begins to bite.
