GLOBAL markets are again inching toward the $50 mark, headlines on Tuesday are screaming. The unrest in Nigeria and the ongoing resistance in Iraq are continuing to play havoc with the markets. Despite OPEC’s promises and initiatives, markets are receiving mixed signal, making them still itchier. The disruption fear is extracting a price of its own!
Crude markets have faced similar situations, in past too. And in the circumstances if the oil producers are calling for lower oil prices and saying that $40 a barrel is not acceptable and sustainable, there are reasons for that too. It would ultimately hurt the oil producers, everyone accepts and concedes here in Dhahran — the virtual global energy capital. OPEC knows the bitter history that at some point in time, high prices will hurt because it would slow world growth and hence could lead to a sudden price collapse.
In 1979, OPEC member states produced 31 million barrels, with Saudi Arabia pumping close to 10 barrels a day. By 1985, OPEC’s production was down by more than 50 percent — 15 million barrels a day —with the Saudi production going down to less than one-third of the peak production.
Indeed those were different days, as Saudi Arabia was playing the role of a swing producer — producing only the quantity required to keep the markets satisfied. Market share was never the issue at the hearts of the Saudi oil managers.
Again in the late 1990s, Asia’s economic bust led to an economic slowdown, cut in global oil demand and the crude prices receded into single digits. There are thus reasons for the OPEC to be extra cautious, as higher than normal prices could lead to denting the global market sentiments resulting in denting the oil demand and hence market prices.
That is the reasons many argue that oil should remain within the OPEC proposed price band. In case the $22-28 price band is impractical in today’s terms, OPEC appears tempted to redefine the price as hovering around $30 a barrel, but definitely not around $40 or even $45, as it stands today.
And in order to ensure price stability in the crude markets in the short-to-medium run, there is a growing emphasis on the part of oil producers to increase their output. Lord Brown, the CEO of the British energy firm British Petroleum, was quoted by the Financial Times as saying that the current problem is a temporary blip caused by surging demand and is likely to be resolved within the year by strongly rising non-OPEC production capacity.
According to some estimates, the non-OPEC production is expected to increase by around 750,000 bpd between now and the end of the year. The Russian oil giant, in the meantime, has announced a five-fold increase in estimated oil reserves.
The Monthly Oil Report of the London based CGES estimates that the OPEC’s spare production capacity at a maximum of 1.5 million bpd. Saudi Arabia, Kuwait and Libya are expected to boost their output capabilities over the coming months, which could lift OPEC’s production capacity by 800,000 bpd.
A similar increase in non-OPEC output between 2004 and 2005, led by Russia, Azerbaijan and Angola yields in total an additional 1.6 million bpd of production capacity between this year and next. And the global oil demand was anticipated to grow by around 2.5 million bpd, leaving a gap. This would result in continued higher than projected oil prices for the rest of the year, until, there is a dramatic slowdown in the world economy and/or an abnormally mild winter reduces energy consumption in the Northern Hemisphere.
