Page 54 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

CHAPTER 1 Floating on Wealth 39

alternative-energy advocates need to work out the challenging eco-
nomics of making such energy affordable. The infrastructure required
for making the transition to alternative energy (for example, develop-
ing fueling stations for electric cars) could be massive. Although
developers have been working on renewable energy for decades, oil
still remains dominant. It remains very difficult to predict how viable
certain alternative-energy sources will prove, and how they will affect
the volume of oil consumption. That said, it is undeniable that the
spread of viable substitutes for oil could have a profound impact on
oil prices in the long run and that the current US administration has
made alternative energy a clear priority.

Upward Pressures
At the same time as the factors just discussed put downward pressures
on oil prices, there are also contrary trends and economic forces that
have the potential to push oil prices upward in the medium and long
term. These contrary trends cannot be overlooked, as they are rooted
in certain economic realities that have long shaped energy markets.
First, a broad-based economic recovery (whenever it takes place)
will naturally bring with it increased demand for oil to be used in
manufacturing, transportation, and other areas. Segments of oil
demand that soften during a recession rebound when there is a recov-
ery, sending oil prices back up. The “spike” in oil prices during this
rebound can be especially sharp if production levels have started to
sag during a recession. Often, recessions also lead to underinvestment
in exploration and capacity building—a phenomenon that sparks
quick booms during a recovery because the growth in production
cannot keep pace with the growth in demand. If this pattern holds in
the current recession, there could be a quick rise in oil prices before a
longer-term stabilization.
In addition, the basic demand for oil has grown steadily over the
past years, largely as a result of increased industrialization and devel-
opment in emerging markets. This trend, which is a long-term phe-
nomenon, marks one of the key contrasts between previous oil booms
and the boom of the 2000s. Whereas previous booms were largely
event-driven (based on embargos or political events), the boom of the
2000s was rooted in a sustained increase in fundamental demand.
Figure 1.6, based on US federal government projections, illustrates
the rapid growth in oil demand from emerging markets expected in
the years ahead.