JEDDAH: The surge in oil prices has focused attention on the critical role played by the refining sector. Lack of investment in new refineries, reflecting poor margins, has led to tightness in the refined products markets, and this has been a source of upward pressure on oil prices.
Changing patterns of product demand, in particular a surge in diesel demand, have led to severe bottlenecks in the refining sector in a number of countries in recent years, according to “The Global Oil Market: A Long-Term Perspective” report by Samba Financial Group, which was released on Saturday.
“Environmental standards, cost inflation and stringent laws and regulations, have tightened refinery margins and constrained operations. This has been accentuated by a mismatch between the quality of fuel supplied and the demand for lighted products,” Howard Handy, general manager and chief economist of Samba, said in the report, adding how refining capacity evolves over the next two decades will thus be an important factor in oil prices, with the quality of future crude supplies also having a bearing.
According to the Organization of the Petroleum Exporting Countries (OPEC), new refining capacity coming on stream through 2015, notably in Saudi Arabia, India and China should be sufficient to meet projected refining requirements. However, as with investments in upstream capacity, given future demand growth uncertainties, the challenge will be to make appropriate refinery investments to meet requirements through 2030.
Adequate oil resources are available to meet the projected increase in demand. Proven oil reserves are sufficient to last 40-45 years at current production level, according to BP data.
According to current estimates, more than three-quarters of the world’s oil reserves are located in OPEC countries. The bulk of OPEC oil reserves is located in the Middle East, with Saudi Arabia, Iran and Iraq contributing 55 percent to the OPEC total.
OPEC countries have made significant contributions to their reserves in recent years by adopting best practices in the industry. As a result, OPEC proven reserves currently stand well above 900 billion barrels.
OPEC countries account for nearly 76 percent of the world’s proven oil reserves, with Saudi Arabia alone accounting for 21.3 percent. Given the positive long-term prospects, demand for OPEC oil will remain strong, and OPEC market power is expected to strengthen over the coming decades. As the largest oil producer and the only one with significant spare capacity, the investment and production policies of Saudi Arabia will thus continue to exert a substantial influence on the supply, and hence price, of oil.
According to the US government Energy Information Administration (EIA), world oil production stalled at around 84.5 million barrels per day during 2005-07, while annual oil demand continued to grow at over 1 million barrels per day.
This imbalance between scarce supply and growing demand, and expectations that it will persist in the future, has put upward pressures on prices during 2008, pushing them to record levels despite evidence that oil production is set to rise during 2008-09 as new projects come on stream. Prices peaked at over $145 a barrel in July 2008, before falling below $100 a barrel in September resulting in a year to date average of about $114 a barrel, up from $72 a barrel in 2007.
The Samba report said there are certainly downside risks in the short term. A possible deep world recession combined with rising spare capacity as new projects come on stream in 2009, could conceivably push prices back down to around $75-$85 a barrel.
World economic growth is projected to average around 3.5 percent a year through 2030, while the world’s population is projected to grow by one percent a year. This will translate into energy demand growth of around 1.5 percent a year, and an overall 50 percent increase in demand. However, demand growth is expected to slow in the short-term (2008-09), reflecting difficult global economic and financial conditions, before recovering.
According to the IEA, overall oil demand is projected to increase by around 30 million bpd through 2030 to reach 116 million bpd. Key to demand growth for oil is the transportation sector. Worldwide consumption of oil for transport is expected to grow at around 1.7 percent per year, with the fastest growth in developing countries which have the greatest potential for increased vehicle ownership in line with rising incomes and investment in infrastructure.
Much of the projected increase in oil demand rests on the assumption of sustained economic growth in developing countries, especially China, India and the Middle East. Oil demand from these three sources has been growing rapidly, adding a combined 5 billion bpd to world demand since 2000.
In the Middle East, Saudi Arabia and Iran are the major sources of growing oil demand, with both currently consuming over 1.6 million bpd each, while the Gulf Cooperation Council (GCC) plus Iran now consume in excess of 4 million bpd.
With massive infrastructure, industrial, and real estate projects in the pipeline, and expectations of sustained economic expansion, oil demand growth in the region is projected to continue growing strongly over the long-term.
