Prices for the world’s most favoured type of oil, light sweet crude, rose to more than $53 on 2 March, within touching distance of record $55 highs set last October.
Opec was so concerned over the possibility of falling prices that it was prepared to institute output cuts at its meeting in Vienna in January.
In the end, it declined to do so. But looking at current data may suggest why.
Demand still rising
The International Energy Agency (IEA) has traditionally been quite conservative on predicting future demand.
Last year it was forced to recalculate its forecasts on a repeated basis. This year it believes that demand growth will be 1.52 million barrels per day (mbpd) annualised over 2005.
“If there is one lesson we have learned from the exceptional oil market conditions of 2004, it is that the world economy has become less sensitive to oil price increases than it was two or three decades ago”
The bank Societe Generale in Paris, as an example, is working on demand increase of around 2.5 mbpd over the same period.
So already this year to March 1st, global oil demand has risen around 245,699 bpd by the IEA figures or by 404,109 bpd, if you prefer those of Societe Generale.
At the same time the most recent IEA report notes that output around the world has been patchy at best.
“World oil supply fell by 645,000 bpd in January to 83.6 million barrels per day, mainly on declines in Opec supply,” said the Paris based organisation. “Non-Opec supply from Canada, Norway and the US Gulf of Mexico remained curtailed and Russian output fell for a fourth month.”
In other words Opec did not cut it’s supply, but the supply simply “declined”.
Yet, speaking in Singapore this week, the secretary-general of Opec Adnan Shihab-Eldin, formerly director of research, issued a much more relaxed statement.
Oil prices continue to climb,
“We hope the fundamental factors, that supply is adequate and Opec will ensure it has the capacity to maintain adequate supplies, will bring prices to a level more reflective of fundamentals and we believe that is $40 to $50 for US crude.”
He then went on to say that “if there is one lesson we have learned from the exceptional oil market conditions of 2004, it is that the world economy has become less sensitive to oil price increases than it was two or three decades ago”.
“The strong growth of the global economy last year, in the face of rising oil prices, clearly supports this statement,” he added.
Yet this sentiment, that high oil prices do not harm the global economy, is “clearly” not one shared by the IEA. It is unusual to find these two major world oil bodies at odds with each other, but the IEA is definite in its outlook.
It says “statements from several Opec representatives suggesting that the global economy has become immune to any negative impact from higher crude prices look disingenuous”.
“Statements from several Opec representatives suggesting that the global economy has become immune to any negative impact from higher crude prices look disingenuous”
International Energy Agency
As well as these ‘declines’ in output from Opec and non-Opec sources comes the stated falls in more mature fields. The IEA noted in August last year that Saudi Arabia has been losing “600,000 to 800,000 bpd” a year.
If one takes the mean figure of 700,000 bpd this year, Saudi fields have already declined by around 113,151 bpd to 1 March.
Prices have also been exacerbated in the very short term by cold winters in the US and especially in the Mediterranean region.
Also, continued supply disruptions in Iraq, including attacks on pipelines in the north and infrastructure problems in the south, have seen Iraqi output fall below pre-war levels.
No indefinite growth
All of these shortfalls, either in increased demand or supply depletion, have to be met by new fields or by increasing current production from existing fields.
Increasing production by pumping harder can also lead to field damage.
But perhaps what is more worrying for ordinary people are the signs that Opec may itself be openly prepared to voice concerns over the short-to-medium future.
“The current exceptional rates of economic growth cannot continue indefinitely. There is increasing concern over growing imbalances”
In his speech in Singapore, Shihab-Eldin continued saying “the current exceptional rates of economic growth cannot continue indefinitely. There is increasing concern over growing imbalances, especially … the large twin deficits of the United States of America, with the potential associated risks to financial stability”.
“We do believe that, if there is [economic] variance, it is more likely to be on the downside, rather than the upside. This would then have a serious impact on the revenue expectations of our member countries.”
Wall of uncertainty
The reason that revenues for Opec countries would be hit is shorthand for a recession. Any recession would dampen global oil demand, lower prices and cut revenues for Opec.
There is certainly a difference of opinion between Opec and the IEA in some areas.
There are also seemingly conflicting statements from both organisations.
But perhaps one quote from Shihab-Eldin is the most pertinent for the man in the street in 2005. A quote we may hope does not bare true.
“When we look at the future,” he said “we find ourselves facing a wall of uncertainty.”