Fear of shortages behind high oil prices

Walid Khadduri, editor of Middle East Economic Survey (MEES), believes fear of oil shortages in the future is behind the upsurge in today’s energy prices.

Khadduri: Demand for petroleum products pushes oil prices
Khadduri: Demand for petroleum products pushes oil prices

Born in Baghdad in 1942, Khadduri received a bachelors degree in social science studies from Michigan State University in 1963 and graduated from The Johns Hopkins University School of Advanced International Studies (SAIS) in 1972 with a PhD degree in international relations.

He joined MEES in 1981 after serving for seven years as the director of information and international relations at the Organisation of Arab Petroleum Exporting Countries (OAPEC) in Kuwait. He was also a member of the political science department at Kuwait University (1973–1975) and prior to that served as director of research at the Institute for Palestine Studies in Beirut (1970–1973).

Khadduri has published and lectured extensively on the oil industry and the Middle East situation.

Aljazeera.net: The price of a barrel of oil reached $49.40 at one point in mid-August, with some analysts speculating that it would eventually breach $50. Last week, Venezuela‘s President Hugo Chavez suggested that the price might well reach $100 soon. What is fuelling the upsurge in oil prices?


Walid Khadduri: It is futile to speculate about how high or low oil prices will be in the near future. It all depends on supply and demand, as well as industrial and political factors. The current rise in prices is attributed to the high demand for energy as a result of the buoyancy in the world economy, particularly in the US and China.


Moreover, there have been almost weekly incidents that have disrupted supplies: sabotage of pipelines in Iraq, terrorist attacks in Saudi Arabia, the Yukos affairs and the disruption of exports to China, for example. Natural disasters such as the hurricanes in the US Gulf of Mexico and fires at refineries also play a role.

A move to dismantle Russia’s Yukos may disrupt global prices

A move to dismantle Russia’s
Yukos may disrupt global prices

What we have today is high demand coupled with disturbing political factors in the Middle East and elsewhere, as well as bottlenecks in the oil industry whether in the upstream or the downstream with refineries and shipping.


However, despite all these factors, the fundamentals do not indicate that price should be this high. There are no physical shortages today, and companies are being given what they ask for. What is keeping prices high today is the fear that there will be shortages in the future, for one reason or another.

Many analysts have brushed off any hopes of a plunge in oil prices with or without OPEC. Some OPEC members have expressed the hopes that the price of a barrel would settle at $22-28, but market factors seem to indicate that is unachievable. Is OPEC out of touch with market realities or are they just paying lip service?


OPEC has not lost touch with reality. The reason the organisation still holds to the price band of $22-28 a barrel, OPEC basket price, despite current high prices, is the fact that it is not sure yet to what level it should change it to. As it is not clear yet where the new price level will settle at, and be sustained for a reasonable period of time, OPEC thinks that it is better to retain the price band as it is until the market can sustain a new price level.

In fact, analysts are making too much of a deal of the price band. What OPEC is focusing on is providing the market with what it needs of crude oil. This is the paramount factor in its strategy and it is meeting that challenge.


OPEC has not yet changed its $22-28 a barrel price band

OPEC has not yet changed its $22-
28 a barrel price band

The second priority for OPEC is to retain a spare production capacity for emergencies, whether they are of an industrial or political nature. Accordingly, we have around 1-1.5 million bpd of spare capacity, mainly in Saudi Arabia. This is not much, but that is what is available at the present time.


Of course, if it is necessary, the industrial countries can use their strategic reserves in times of emergency.

Oil prices are determined by market forces, not the OPEC price band. OPEC member countries price their crude in relevance to the daily evolution in Brent and WTI prices in the North Sea and the US, respectively. The function of the price band is to assist OPEC member states attain a reference price for their revenues. It is not a market reference.

With political and military instability in Iraq, is it likely we will ever see an end to attacks on the oil infrastructure? Is there a reason that almost on a daily basis we see attacks on oil pipelines? Can Iraq‘s oil infrastructure be protected?


The Iraqi Ministry of Oil is doing its best to protect the country’s infrastructure from sabotage and destruction. Unfortunately, the company that was awarded the security contract in 2003 was unable to draw the right plans for this big challenge.

Meanwhile, Iraqi oil production and exports will continue to face destruction as long as the country lacks security. The one is the function of the other. It is not difficult to target pipelines as there are about 6000km of lines throughout the country.

Iraqi pipelines are targeted on a nearly daily basis

Iraqi pipelines are targeted on a
nearly daily basis


Moreover, the insurgents target the oil industry because it is vital to the domestic system (power, refineries, etc), and as the country’s main foreign exchange earner. Iraq today earns about $50-60m per day. The attacks will continue as the target is vital to the country’s survival and wellbeing.

Does the current upsurge in oil prices seem to hint that hybrid fuel economies will emerge? Will industry move to further fund research and development in this sector?


The current high oil prices today are not driven by shortage of supply, but by high demand for petroleum products. The demand for oil is mainly in the transportation sector and in the petrochemical industry. While there are alternatives available, such as fuel cells and alcohol, industry sources indicate that the alternatives will not chip away from oil’s share in the world energy basket for years to come, perhaps decades.

There are about 600 million vehicles in the world today. A decade ago, China used to have around 80 million bicycles. Today China is producing tens of millions of new cars a year. So far all these cars use gasoline or diesel.

As long as this is the case, the demand for oil will continue. The problem with fuel cells is that they are expensive, require hydrocarbon and are not as friendly to the consumers as the combustion engine car. Until all these factors are dealt with, the demand for oil will continue to rise.

Source: Al Jazeera

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