Oil Dependence: Is Transport Running Out of Affordable Fuel?
| Date: 04 May 2011, 07:40
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# Paperback: 210 pages
# Publisher: Organization for Economic Cooperation & Devel; Pap/Ado edition (May 30, 2008)
# Language: English
# ISBN-10: 9282101215
# ISBN-13: 978-9282101216
1. INTRODUCTION
Crude oil prices were nearly 100 dollars a barrel when the Round Table convened in November
2007. In real dollar values, this matched the historic peak in oil prices of 1980 (Figure 1). The gradual
rise in oil prices to these levels over the last five years was driven fundamentally by growing demand,
especially from China, in combination with limited elasticities of supply. Whilst the outlook for supply
and demand suggests prices are likely to remain high in the next five years, any slowdown in world
trade and economic growth would result in a fall in oil prices, and probably a large fall. Whether
prices rise or fall, they are expected to continue to be characterized by sharp spikes and troughs.
The Round Table examined the factors that drive oil prices and those likely to be most important
over the next 25 years. It then reviewed recent evidence on the response of road transport activity to
changes in fuel prices in order to explore linkages between transport and energy policies. The Round
Table also examined the outlook for oil supply, together with the implications for climate policy if
very heavy crude oils, tar sands, oil shales or coal-to-liquid fuels are developed on a large scale.
Discussions then turned to potential policy responses, on the supply side and on the demand side,
revealing some critical trade-offs between climate change and oil security policies. If these
interactions are ignored, energy policies in the transport sector could result in large unnecessary costs.
2. OIL PRICES DRIVERS 1960 TO 2007
The impact on oil prices of action by the Organization of Petroleum Exporting Countries (OPEC)
to restrict oil supplies in 1973 and 1979 is obvious in Figure 1. The motivation for restricting supply
was in both cases political (the Yom Kippur War and the Iranian revolution) rather than aimed at
maximizing profits2 but coincided with peaking of US oil production, which endowed OPEC with
market power to control prices. OPEC subsequently used this power to defend high oil prices by
setting production quotas for its members. Although oil producers in the USA were unable to expand
supply, the high prices did drive exploration and rapid development of oil fields in other non-OPEC
countries. This gradually eroded OPEC market power until the point in 1985/6 when prices collapsed.
This price collapse stranded high-cost investments made by the major oil companies. The effects
are still felt today, with a strong aversion to (over-) investing in oil production, oil refining and fuel
efficiency on the part of private oil companies and car manufacturers. The consequence is that supply
is not very elastic, even with strongly rising demand. And uncertainty over future prices, as well as
rising resource costs for extraction and refining, further discourages major investments.
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