The telephone line was crackling when Daniel Yergin called me from Kazakhstan on Friday but there was nothing unclear about his message: oil is the new gold.
It's the new gold because the black stuff has become a hedge against the dollar, a new asset class of its own. Yergin also says the price of oil is close to reaching what he calls its "break-point". This is when the price – the latest is $136 a barrel – triggers a sea-change in attitudes from governments, to car-makers to consumers. He reckons it won't be long before serious money goes into alternative energy sources and car-makers stop making vehicles like the Hummer completely. Consumers, he notes, are already filling their tanks with the same care as they would if petrol were, in fact, liquid gold.
Yergin's views are always worth listening to; he is one of the world's smartest gurus on oil and author of the Pulitzer-winning book, The Prize: the Epic Quest for Oil, Money and Power. As chairman of the US-based Cambridge Energy Research Associates, Yergin makes his gold from advising governments, companies and individuals on future energy needs. He was in Kazakhstan talking at a conference on the prospects for Eurasia – one of the five global regions with the fastest economic growth thanks to its subterranean wealth.
I was keen to find out what he is thinking because so many wild predictions were being thrown around last week. One analyst predicted oil at $150 a barrel by July. Then came Gazprom's chief, Alexei Miller, with a warning that oil would double to $250 by the end of next year. Yet another analyst warned the price would collapse to $80.
Who's right? Yergin won't predict, but he will say that the economic consequences would be too disastrous to contemplate if oil hit $250. But he agrees that we are in the middle of the biggest oil price crisis for more than 30 years and that the biggest driver to the recent spikes in the oil price is the weakening dollar. That's why financial investors have been pouring into oil.
This has been compounded by a downturn in supply from Russia and the Middle East because of under-investment in production. Other factors muddling the picture are a shortage of petroleum engineers, the cost of drilling rigs – which has gone up in a year from $125,000 to $600,000 a day – and rising environmental concerns. That's why looking at supply and demand alone is too simplistic.
Nor has the world run out of oil. We have plenty left, certainly for another 100 years: estimates suggest that, by 2010, capacity could grow by 16 million barrels a day to over 100 million, a 20 per cent rise in capacity which should meet projected demand. Most of this will come from Opec producers but also non-Opec countries such as Russia. Technology has improved so much that what was once deemed unconventional oil – found in oil sands – is now economically viable.
But much of this oil needs heavy investment because of the cost of drilling deep down into the oceans. At least a quarter of the world's proven reserves lie hidden on the bed of the Barents Sea, between Norway and the Arctic, an area already known as the Northern Persian Gulf. For now, though, the Norwegians are still environmentally soul searching.
Yergin also puts this latest crisis into a historical context: it's not the first time the world thinks it has run out of oil. More like the fifth. The first oil crash was in the 1880s, followed by another after the First World War – a catalyst for putting together Iraq – then in the 1970s and again in the mid-1980s. This probably won't be the last crisis either.
Yergin's advice is to watch the dollar; that's the best oil guide. And watch out for Japan – which has no oil but does have some of the world's best brains – to come up with the first real long-life car battery. That's the race to be in.