2004 was a landmark year that people in the oil industry are unlikely to forget. The cooling down of the crude market prices is because the growth in crude demand is finally slowing down. Hyper-growth in demand combined with political instability and insecurity in major oil producing areas, contributed to the crude price crossing even the $55 a barrel psychological mark last October.

OPEC now feels that growth in oil consumption is in for a slow down in 2005. OPEC demand growth forecast in global crude consumption of 1.5 million barrels per day (bpd) for 2005 is considerably lower than the consumption demand growth of 2.5 million bpd experienced last year.

Lower economic growth in 2005 is expected to lead to an easing in incremental demand from the high rates seen in 2004, OPEC said in its Monthly Oil Report.

OPEC projects only 6.4 percent growth in Chinese demand this year, down from 14.2 percent recorded in 2004. The Chinese factor weighed heavily on the supply price equation in the global crude markets last year.

In December the OPEC secretariat projected the call on OPEC during 1Q 2005 at 28.1 million bpd.

Although some in the industry, including the London based Center for Global Energy Studies (CGES) term it as ultra pessimistic, yet the fact remains that the global oil demand is not growing at the pace witnessed last year.

The CGES believes that the call on OPEC would be around 29 million bpd in 1Q 2005. But even this projection is considerably lower than the call on OPEC recorded in 4Q 2004 — 29.9 million bpd. Further the CGES also felt that the global oil demand during 2005 would only grow by 1.4 million bpd versus 2.6 million bpd experienced last year.

In the meantime, OECD energy watchdog the International Energy Agency (IEA) also agrees with the above forecasts. The IEA late last year cut back its own forecast for growth in demand in 2005 by 80,000 bpd to 1.4 million bpd. The IEA also concluded that the growth in Chinese oil demand has also slowed down in the last two quarters of 2004 and is slowing down still further.

Hence the OPEC, the CGES and the IEA, all agree to the fact the demand growth is indeed slowing down apparently a consequence of the higher than normal oil prices throughout the 2004. Hence the softening of the global crude markets!

Further the OPEC decision to cut output by 1 million bpd from January this year would also exert a — psychological impact — on the market. The crude market had almost exhausted all its spare capacity late last year, as the OPEC had to open its taps to quench the global thirst. This non-availability of any real spare capacity was also having an effect on market sentiments, especially when coupled with insecurity in the oil producing region generating supply disruption concerns all around.

OPEC states are already investing in extending the thin spare capacity. Saudi Arabia brought on stream last week Qatif oil field, adding some 800,000 bpd to its capacity.

Minister of Petroleum and Mineral Resources Ali Al-Naimi is on record saying the Kingdom was working to expand its output capacity to 12.5 million bpd. Other OPEC countries, Algeria, Iran and Kuwait, are also expected to boost capacity by about 500,000 bpd this year.

The additional spare capacity will leave the market better equipped to deal with possible disruptions.

For almost three decades, OPEC countries have been at the receiving end of sermons about how they should run their economies for the good of the world economy. When oil prices rose, they were advised, by all and sundry, to open up taps and let the international oil majors enter their fields, ensuring capacity expansion to satiate the rising global crude demand. When prices fell, OPEC was told to sell assets to cover financial deficits.

If the major oil companies can strategically work to maximize returns to shareholders and be selfish in that regard, the single commodity economies of most of the OPEC countries also have the right to be somewhat selfish. One may like it or not, yet, that right ultimately will have to be conceded to the crude producers too.