In a week to last Friday, crude knocked off nearly 13 percent off the record peak registered the week earlier. And then it went down further, before registering resistance. And this knocking off had nothing to do with the fundamentals of the market. Easing of tensions with Iran, bigger than expected growth in US crude reserves and the growing concerns about the health of the US economy apparently dampened the market sentiments, underlining once again the complexity of the energy markets. Irrespective of what one says, the fact remains crude is not that crude an affair. Extra fundamentals continue to play a strong role.
And this is what, despite calls to the contrary, Saudi Arabia has been insisting at the highest level. In an interview with an Italian newspaper, Custodian of the Two Holy Mosques King Abdullah last week emphasized, “Anyone who pretends that a production increase will ease speculation is mistaken... speculators believe that prices will remain high.” And then he clarified, “When the price of oil hovered around $100 a barrel, we were already unhappy. Imagine what we feel now, when there is talk of $200.” Indeed not every one agrees to this, making the entire debate a very interesting one.
Oil is special for more than one reason. Politics apart, the basic principle is that the producers need to sell it, all the more as most of them are virtually single product economies. In simplest terms, they cannot sustain without selling crude. On the other hand, consumers absolutely need to buy it, irrespective of their political affiliations.
Whether one hates or loves, the fact is that energy makes this world more and more interdependent. Consumers and producers are mutually dependent and, yet poles apart!
And this is the problem the world is faced with. How to bridge this widening gap?
With the world facing what is practically being termed as the third oil price shock, there is a growing onus on bringing the two sides together. However, the efforts as yet have not been convincing. Blame game appears to be ruling wherever and whenever the producer-consumer dialogue takes place, with both sides sticking to their original positions.
For their part, consumers are increasingly eager to avoid reliance on imported oil and gas. President Bush has repeatedly stressed upon it. The hawk in the Italian Prime Minister Silvio Berlusconi insists on the consuming countries to meet and fix a maximum price they are willing to pay for oil or they would have to invest in nuclear power.
Is that possible? Before suggesting any such idea, Berlusconi needed to be practical. It takes years to bring on new nuclear capacity and it does not meet transport needs, one cannot refrain pointing out. And the bulk of the crude consumption, up to 75 percent, is in this very sector — transportation.
The London-based Center for Global Energy Studies in its current Monthly Oil Report (MOR), blaming the OPEC for the current predicament of the markets, stresses the world needs more crude oil, priced at a level that makes it viable to process more of the heavy grades in refineries without sophisticated upgrading capacity. “However, Saudi Arabia, the one country that could supply significant additional volumes quickly, refuses to widen the discounts against benchmark grades for its heavy oil, while OPEC continues to assert that the world is well supplied with crude and refuses to accept that production needs to rise. In the absence of additional supply, only a global recession, destroying enough demand to reduce the need for OPEC oil, can set prices on a downward path. It is a bleak picture. OPEC’s continued assertion that the world is well supplied with oil does not stand up to scrutiny,” the MOR stressed making clear its view on the issue.
The dividing lines are getting deeper and the producer-consumer dialogue remains the only way out, one strongly feels. This is despite the fact that some remain skeptic of the process of the dialogue and accommodation. Libya’s top oil official Shokri Ghanem, is one of them. “From the beginning, I said this is a big subject to be discussed in a very short meeting. It will be just a few niceties, a few words here and there,” Reuters quoted him as saying recently.
Others, however, concede there is now a greater recognition of a mutual need to pursue the process, at all levels and all groups. And the trend is evident. In April, the IEF Ministerial took place in Rome. It was followed by the Saudi convened energy summit in Jeddah last month and then it was immediately followed by the World Petroleum Congress in Madrid.
At the initiative of Gordon Brown, leaders of the Group of Eight (G-8) industrialized nations meeting in July agreed to convene a world energy forum in Japan in September to discuss energy efficiency and new technology.
And then while in Jeddah at the specially convened energy summit, the British prime minister offered to take the dialogue further by hosting follow-up talks in London late this year.
“Each of us must do what we can to alleviate these difficult conditions,” argued the Saudi Minister for Petroleum and MIneral Resources Ali Al-Naimi.
And the reasons are simple. “The big producers and big consumers need each others very much and that’s always the bottom line,” says Mike Wittner of Societe Generale.
The momentum toward a mutually agreed solution to this complex issue is definitely on rise. “Although you are not going to see a sea change because of the Jeddah and G-8 meetings overnight, they could deliver some very real political benefits which will improve the upstream outlook as we go further forward,” concedes Lawrence Eagles of the International Energy Agency.
The process of consumer-producer dialogue initiated in a formal way through the International Energy Forum is galvanizing into the next higher stage. Many now feel that in the recent rounds, emphasis on point scoring has gone down.
And thus despite all the emphasis on alternative energy, on lessening dependence on the fossil fuel from the “uneasy and turbulent” Middle East, the fact remains that oil would continue to remain the main source of energy for many, many more decades to come.
And with both sides now feeling the heat, the onus seems to be falling back on dialogue between the producers and the consumers. And it has to be a process rather than an event.
There’s just no way out!
