It is not very often that OPEC and the International Energy Agency, the OECD energy watchdog, with conflicting and contrasting interests and job descriptions agree on issues. Yet the energy world is such an equalizer that both are coming to virtually the same conclusion about the basic issue afflicting the energy world today — how to overcome and tame the bull ride in the oil markets and ensure security of supplies to the energy thirsty world.
OPEC and its stalwarts, including Minister of petroleum and Mineral Resources Ali Al-Naimi have been stressing for considerable period of time now that there is plenty of oil in the market, and in the pipelines, and all talks of shortage and scarcity is mere speculation. And that more oil in the market would not help deflate the oil prices.
Now even the IEA sees eye to eye with the OPEC on the issue. The head of the International Energy Agency Claude Mandil says that the world does not need more oil (now) to moderate record prices. He also stressed the point, the OPEC stake holders have been trying to drive home for some time now, that OPEC alone is powerless to bring down oil prices without the easing of political tension in the Middle East — the prime producing region. ‘Nothing can moderate oil prices if there are no improvements in the political situation in the Middle East and all places where there is turmoil,” Mandil was quoted as saying as the Lebanon crisis loomed large. Mandil doubted the ability of the OPEC, and its largest producer Saudi Arabia, to bring the prices down simply by pumping more oil to the market. “That won’t work,” he almost conceded.
The monthly oil report of the London based Center for Global Energy Studies, released on July 24 explicitly says so. “Oil price hit new record levels over the past month as violence flared in the Middle East and the market feared for the security of oil supplies, in the event of the conflict spreading to Syria, or possibly Iran. A strong global economy and limited spare capacity, to either produce light sweet crude or to upgrade oil into much-need Sulfur free transport fuels, have continued to support oil prices and created an environment in which every threat of disruption triggers a rapid and violent price reaction.” Indeed the CGES report also does not speak of any non-availability of crude in the market.
In fact stocks in the US, the world’s largest consumer, rose by 200,000 barrels last week, the Energy Information Agency of the US revealed. gasoline supplies also went up by 1.5 million barrels while distillates, being used to make diesel fuel and heating oil, rose by 1.2 million barrels.
According to analysts, the supplies of all the three products are at “above average levels for this time of the year,” especially crude, which is described as, “well above the upper end of the average.” Supplies do not seem to be the real problem of the market today.
The IEA chief hence emphasized on more investment in output capacity, so as to be better prepared to cope with any supply shocks, as this only could help stabilize the crude market. Indeed he had a point to prove.
Lack of spare capacity has been one of the key drivers of rising prices over the last 12 months. Available significant spare capacity in past has acted as a safety cushion, enabling OPEC to increase production in the event of disruption of supplies from an oil producing region, as has been the case in past.
During both the Gulf wars, as production from important OPEC members, Kuwait and Iraq, came to an abrupt halt, Saudi Arabia and others used their available spare capacity to overcome the shortfall. The markets remained well-oiled, as mothballed wells were brought back into production. The world did not suffer on the account, despite disruptions. However, with little spare capacity in the pipeline now, global crude markets appear unprepared to face supply shocks.
And with no dearth of potential hot spots in the oil rich Middle East, the ongoing Lebanon issue an addition to the already long list of conflicts in the region, possibilities of shock remain real.
That’s disturbing the markets, the IEA chief was apparently referring to. And indeed OPEC has no power to solve these complex political riddles of the Middle East. And in the absence of any resolution of the regional conflicts, the possibility that the crude markets would cool down considerably over the next few months could only be termed as very remote at this stage.
And Claude Mandil had another very important point to make too. ‘I don’t think, any country could do anything independently. We don’t need more oil. We need more investment in capacity.’ And when Mandil stressed on greater cooperation on the issue of energy, one cannot but agree with him.
The G-8 also stressed on increased coordination and cooperation so as to ensure energy security. Now it seems, both the consumers and the producers are coming round to the point that coordination between them is the need of the hour. All the efforts directed at improving this cooperation and coordination, making things as transparent as possible in the process, appear crucial for the very sustainability of this energy driven civilization.
However, national priorities and interests often dictate policies in the opposite direction. And it is here that organizations such as the International Energy Forum Secretariat, established in Riyadh will have to play more active and pivotal role. This is what the G-8 expects of them and this is what the OPEC expects of them. After all the survival of this energy driven civilization depends on the success of such efforts. Energy diplomats indeed have a major task in hand!
