IMF urges oil data transparency

Twice in as many months, the International Monetary Fund has spoken out over the current oil price shock, and when the IMF issues reports, markets read them.

    IMF: Opec will have to double production within 25 years

    Although it says there is no need to panic, some of the conclusions in the two reports - Oil Market Developments and Issues and World Economic Report: Will the Oil Market Continue to be Tight? - make unnerving reading.

    Especially for Opec countries who are called on to make radical changes.

    Current predictions of future demand, such as those released by the International Energy Agency (IEA), are called "conservative" by the IMF. This throws into question future predictions about already tight supply.

    Uncertain production

    In terms of growing demand the IMF is certain that the world is on the cusp of rapid change.

    "Demand is projected to grow rapidly, but prospects for increased production are uncertain. Although higher oil prices, if they persist, should encourage investment in the oil sector, impediments remain," it says.

    "Demand is projected to grow rapidly, but prospects for increased production are uncertain. Although higher oil prices, if they persist, should encourage investment in the oil sector, impediments remain"

    International Monetary Fund

    For example, there exists a fear that oil producers could over-invest in case prices fall. Furthermore, it takes some seven years to proceed from the exploration stage to the drilling and consequently the production stage.

    The IMF also lists the uncertainty of the global economy reaction to short term high prices: If high prices cause a recession, demand for oil will fall and so will prices, making investment unattractive.

    However, the Fund is sure demand will continue to grow and predicts that Opec will have to double production within 25 years, a feat that will require unprecedented levels of investment in member states.

    "Demand for crude oil is likely to grow steadily ... requiring large upstream investments conservatively estimated by the IEA at around $90 billion per year.

    "The IEA projects demand to rise by around 38 million barrels per day (mbpd) by 2030, although that may be conservative. With non-Opec production expected to increase by only 7mbd over this period, the call on Opec will double relative to today," says the IMF.

    "It's a serious issue," analyst Bruce Evers of Investec in London tells "Where will the extra supply come from? Opec has brought this on itself by not investing anything at all and it has paid too much attention to woeful underestimates of demand by the IEA."


    The IMF agrees with Evers, pointing out that production, especially from Opec countries, has failed to keep pace with demand.

    "Following substantial increases during the 1970s and early 1980s, productive capacity in the oil sector has stagnated relative to the growth in global oil demand. In particular, Opec's current capacity is lower than 1978 levels, despite some recent pickup," it says.

    The IMF does not look at the subject of "peak oil" as a reason for plateaued production. Instead, they say that under-investment in production is the reason for high pricing and market volatility going forward.


    Production, especially from Opec,
    has failed to match demand

    "Right now, there may be spare capacity, maybe one half to three quarters of a million barrels per day from Opec, but then they will be flat out," says Evers.

    "Where they will get the rest from is uncertain. Redeveloping old fields with modern techniques? New fields?"

    The IMF goes on to point out that non-Opec production is set to fall over the next 25 years, peaking in 2010.

    This will increase extraction costs for non-Opec producers, for example, Russia, the US or Norway.

    They will be forced to seek oil in more difficult regions with higher production costs, such as deepwater wells.

    On the other hand, Opec extraction prices will remain roughly the same. Thus Opec needs to rapidly increase production to provide the world with a "supply cushion".

    "Given the experience with spare capacity of the 1980s, Opec is likely to follow a wait-and-see approach. It has indicated that it will continue to ... aim for at least 1.5 million barrels of spare capacity. This ... is unlikely to be sufficient to stabilise prices and deal with potential supply disruptions ... a level of spare capacity in excess of 3 to 4mbd might be needed to act as a stabilising influence on markets," the IMF report says.

    Hitting $120?

    The IMF believes that major economies can sustain growth with oil prices at $50 a barrel. At $80 a barrel, the IMF projects major economies would continue to move forward with gross domestic product (GDP) in the US, for example, affected by only 0.8%. 

    Current high petrol price may
    seem cheap if crude hits $120

    However, it then goes on to consider oil prices at $120 a barrel, a figure that is considered unusual and beyond even the forecasts of Goldman Sachs' "superspike" report. 

    At such a high price of oil, the IMF predicts world economies will suffer significant financial problems, inflation and a rapid rise in interest rates.

    "[In the] US CPI (consumer price index), inflation could rise above 5% in the first year and GDP growth decline by 2.3%. In that case, delaying interest rate hikes could be costly."

    Some of the IMF's predictions are open to question. Although they believe under-investment is the problem in production they also admit that proven reserves will not last much beyond the next half century.

    "Proven oil reserves are sufficient to meet world demand at current levels for over 40 years," the IMF report says.

    Data transparency

    The IMF strongly urges full oil data transparency to document current global oil reserves and their locations. By referring to the lack of data transparency in "non-OECD" (Organisation for Economic Cooperation and Development) countries, the IMF is telling Opec to allow its reserves to be fully audited, and soon.

    "Where will the extra supply come from? Opec has brought this on itself by not investing anything at all and it has paid too much attention to woeful underestimates of demand by the IEA"

    Bruce Evers,
    analyst at Investec in London

    "It's been a bugbear of mine for years," says Evers. "There is increasing pressure on Opec to come clean because people think a few magic wands have been waved over reserve data.

    "But whether you will get anywhere is open to question. The IEA cannot collect any accurate data, because the data they are given is also so poor. So you end up with lamentable statistics."

    Inadequate data transparency is particularly harmful because it contributes to increased perceptions of risk and consequently, a reduced willingness to invest. This ultimately increases price volatility, the report says.

    As a worst case scenario, the IMF contemplates the prospect of data on Opec reserves turning out to be false. The IMF says that by 2010 the demand on Opec supply will be 32mbd, an increase of around 3mbd "excluding inventory changes".

    "Inventory changes" is shorthand for the possibility that Opec may not have as much oil as its data shows. If inventories have to be changed, or marked down, then Opec may find it impossible to meet demand. That would throw every forecast wholly out of sync.

    Twelve months ago it would have been unlikely to see such strongly worded questioning of production and reserve data from a body such as the IMF. What they will be saying in another 12 months is anyone's guess.

    SOURCE: Aljazeera


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