JEDDAH: As global demand for oil increases, the Organization of Petroleum Exporting Countries (OPEC) has embarked upon substantial investments, both upstream and downstream, to ensure that the world economy benefits from regular and secure oil supplies.
OPEC spare capacity has played a critical role in ensuring that oil markets remained well supplied and the industry is investing heavily to expand capacity. OPEC crude oil production capacity (excluding Iraq) is projected to increase to around 36.9 million barrels per day (mbpd) by 2010 from 31.7 mbpd in 2005. In addition, Iraq’s recovery should contribute significantly to raising OPEC’s overall production capacity, according to information available on OPEC website.
In the medium term, over 100 projects, with an overall estimated cost of some $120 billion are being undertaken by OPEC member countries (excluding Iraq) which will increase to 120 projects with total cumulative capital expenditure likely to exceed $160 billion by 2012.
OPEC has increased its crude supply by 4 mbpd since 2003, with another 1 mbpd increase coming from its natural gas liquids (NGLs). These investments are expected to result in a net capacity increase by 2012 of over 5 mbpd from 2007 levels. So there is certainly enough supply, and there is ample investment. All of this points away from the direction of high prices. Clearly, elements other than supply and demand fundamentals are at play. The first element is related to the fall in the value of the dollar in relation to other currencies. Another element driving oil prices relates to the role of regulated oil futures and unregulated over-the-counter (OTC) exchanges. The trade in paper barrels has expanded dramatically in recent years.
While OPEC itself has no influence over speculation and investor behavior, it continues to take action in other important areas where it can make a solid, meaningful contribution, in the interests of market order and stability. The key examples are OPEC member countries’ upstream capacity development, and where possible, downstream expansion at home and abroad to help ease some of the severe bottlenecks in the refining sector that have emerged in a number of consumer countries in recent years, according to OPEC’s World Oil Outlook (WOO) 2008 report.
This year’s assessment, covering both the oil industry’s upstream and downstream sectors, highlights the importance of understanding supply and demand prospects, environmental-related issues, sustainability, the challenges and opportunities ahead, and the inherent uncertainties contained in the overall outlook.
These issues were also underlined at the third OPEC summit that took place in Riyadh at the end of 2007. The event culminated in the Riyadh Declaration, which reaffirmed the organization’s commitment to the stability of global energy markets, the promotion of energy for sustainable development and the protection of the environment.
Today, what is apparent is that oil supply and demand fundamentals are healthy. There is, and has been, more than enough supply to meet demand, and oil stocks in major consuming countries are at comfortable levels. This should point away from the direction of current price levels. The OPEC report said resources are plentiful, but the challenge, particularly for OPEC, stems from the uncertainty over how much future production will be required to satisfy demand for oil while making available sufficient levels of spare capacity. Drivers of uncertainty include consuming countries’ policies, the rate of future world economic growth, technological developments and non-OPEC performance.
Beyond 2012, non-OPEC supply is expected to maintain its growth, particularly from non-crude sources, such as oil sands, and biofuels, mainly in the US, Europe and Brazil. In total, almost 11 million bpd of non-conventional oil supply comes from non-OPEC by 2030 in the reference case, an increase of more than 8 million bpd from the 2006 level. By 2030, total non-OPEC supply reaches 60 million bpd. These figures suggest that an additional 12 million-13 mbpd of OPEC crude will be required by 2030, but the share of OPEC crude is not expected to be markedly different from that of today. Total demand for conventional crude will not exceed 82 mbpd by 2030.
The OPEC reference basket (ORB) of crudes has increased substantially over the last five years from an average of $28 a barrel in 2003 to over $130 in June 2008. The OPEC basket price was $116.22 a barrel on Tuesday. World oil demand is expected to increase from 84.7 mbpd in 2006 to 113.3 mbpd by 2030.