With a major upward shift in the equilibrium price of oil in recent months, the emphasis on credible energy data is growing rapidly. The G-8 summit in Gleneagles, Scotland, last week, despite many other pressing issues, also took stock of the current tight energy balance. The meeting of the world’s industrialized majors also emphasized on the need of significant investments required in the sector, “in the short, medium, and long terms, in exploration, production, and energy infra-structure to meet the needs of a growing global economy.”
Underlining the fact that one factor exacerbating uncertainty in the global crude markets is the lack of transparency, the G-8 communiqué commended the Joint Oil Data Initiative launched by several international organizations, including the IEA, and now managed by the Riyadh based Secretariat of the International Energy Forum.
We are in the midst of a major paradigm shift in the oil market equilibrium. In the meantime, while the crude markets were bracing for the onset of the storm season in the Gulf of Mexico, a storm of another kind was also almost ready to envelope the crude fraternity.
During the week, the controversial book from the controversial energy analyst Matthew Simmons, “Twilight in the Desert”, finally also hit the stands. In the book Simmons argues rather forcefully that some of the world’s largest reserves are grossly overestimated and hence the world is in for a “crude shock,” in not too distant a future.
Prices would rise dramatically over the next few months; Simmons leads everyone to believe. A debate on the credibility of the data available has definitely been set into motion. However, not everyone is so scared about the future availability of energy resources!
The Geneva-based International Energy Agency, the OECD energy watchdog, believes production in the Middle East will more than double to 25 million barrels a day within the next 20-30 years. The Economist Intelligence Unit has lately also predicted that oil prices will peak by the end of the year, and then decline by 10 percent in 2006, as the Chinese economy slows, reducing demand.
Some others including the Cambridge Energy Research Association, thinks today’s high prices will ultimately lead to enough investment to boost global oil production significantly - perhaps as much as 20 percent by 2010. That would outpace the consumption growth and (could) lead to fall in prices. Indeed, CERA reckons that investment-production cycle takes its own time, however, and it isn’t likely that much new oil will come before 2007.
Saudi Arabia, the producers’ kingpin, is also trying to counter the message with its full resources. It has been assuring the world that the Kingdom’s giant oil fields hold plenty of spare capacity to meet the rapidly increasing global crude demand. End June, apparently to checkmate the arrival of Simmons’ book on the stalls, senior Saudi Aramco executives were seen active in Washington reiterating before the energy fraternity that the Kingdom’s crude expansion program was well under way.
Calming fears provoked by Simmons’ book, Saudi Aramco Senior Vice President Khalid Al-Falih reassured his Washington audience that all was well in the Saudi oil industry and that Riyadh was committed to maintaining a crude spare capacity of 1.5-2 million barrels per day as a cushion against any possible supply disruptions in the global supply chain.
“We have in these reserves over 100 years at current production,” Al-Falih told the audience at the Center for Strategic and International Studies in Washington. Saudi Arabia, he said, has depleted only 28 percent of its reserves. It will add 3.1 million barrels of new daily production over the next five years.
As some existing wells decline, on net that will boost today’s daily output capacity by about 1.5 million barrels to about 12 million barrels. If needed he said, Saudi Arabia could produce up to 15 million barrels per day over the next few years.
Al-Falih strongly countered the argument of Saudi Arabia reaching peak any time soon. “Saudi Arabia is in no danger of hitting peak production in the next few decades. We are not going to be peaking any time soon, not in 20 years, not in 30 years, not in 40 years.”
A major gap in perception definitely exists. The JODI initiative could go to some lengths in taking care of these issues. And at this moment that remains the best possibility of bringing the two divergent schools of thought somewhat closer. Eyes are hence focused on the first installment of JODI data.