Oil Market Looks
Volatile
Through 2005
By Adam Porter
31 January 2005
Aljazeera
The
thaw in America has fixated the oil market in recent days, soothing
prices that touched $50. But any hopes for a long-lasting respite from
high oil costs looks extremely weak.
A combination of
events seem destined to maintain high prices and market volatility throughout
2005.
For one, Opec has
raised the possibility that it may actually cut production. Its meeting
in Vienna this weekend may finalise a one million barrel per day (mbpd)
cut in production.
This would put stated
production at 27mbpd, firming up prices. This despite the current price
of around $48 being way over their stated preferred price of $35.
The reality of Opec
production is, of course, shrouded in secrecy. In December, Opec's output
was 29.5mbpd according to the International Energy Agency (IEA).
The production cut
muted by Opec would mean it would produce only 27mbpd, in effect a 2.5mbpd
cut. No one expects member countries to do that, no matter what they
announce.
Opec already admits
its members routinely bust quotas.
For another, it
does appear that the 11 Opec members, with the possible exception of
Iraq, are determined to keep prices high.
Iran's Oil Minister
Bijan Zanganeh has actually stated that the world is oversupplied.
"They say it
is over one million (barrels per day). Everyone agrees there is over
supply." Everyone in Opec that is.
Other members such
as Algeria, Venezuela and Saudi Arabia have also stated a price crash
is out of the question.
In part this is
due to the devaluation of the dollar, which means oil producers get
less buying power per barrel. But the major reason is that the Opec
countries' governments are basking in cash windfalls, in just the same
way as the British and US corporate giants such as BP and Exxon.
Estimated profit
increases ran at 43% last year for Opec countries. They are unlikely
to choose to forfeit those same levels of revenue in 2005 by over-production.
But another more
fundamental reason may be that they are simply unable to pump any faster,
even if they wanted to.
Kenneth Deffeyes
of Princeton University is one of the leading sceptics about international
oil reserve figures. Especially those of Saudi Arabia and its mega-field,
Ghawar.
"Saudi Arabia
could increase production, but they would soon regret having done so.
An abrupt increase in their production rate would pull water up through
the Ghawar field, like a teenager sucking on a soda straw."
The water Deffeyes
talks of is that injected into the oilfields by Saudi engineers to keep
pressure up. This maintains higher production levels, but can also mask
dwindling reserves.
"Saudi Arabia
was supposed to be the world's last source of unused production capacity.
At this point, there seems to be no surplus oil production capacity
anywhere in the world," Deffeyes says ominously.
As well as the Opec
supply conundrum, one of the single biggest reasons for the increase
in oil prices has been the growth of consumption in China.
The government in
Beijing announced last year that it was going to slow its growth in
order to ease stresses on the world economy. Especially on oil prices.
However, that stated slowdown is yet to materialise, as China announced
a new set of industrial figures this week.
The Chinese economy
grew by about 9.5% in 2004: capital goods and fixed assets up 21.3%,
heavy industry was up 18.2% and light industry by 14.7%. Crucially power
generation increased by 14.9%. All of which adds to large leaps in demand
from China for oil.
In fact, a demand
increase for 2005 at more than 11% is predicted by the Chinese National
Petroleum Corporation (CNPC). This on the back a 14% rise in 2004.
The exact phrase
used by the Chinese government to describe this level of economic growth
was "stable and rapid". It is the rapid part of that statement
that worries analysts.
China has also been
pro-actively sourcing outside oil in order to fuel itself and cut repeated
power outages. To do this it has moved into areas previously regarded
as the property of the United States.
In December, President
Hugo Chavez of Venezuela visited China and announced that trade would
boom to $3bn in 2005. Mostly on the back of energy-related agreements.
Venezuela has traditionally
been a supplier of about 15% of US oil imports.
However, in what
some analysts see as a pre-emptive move by the Latin American nation,
Chavez agreed to $410m worth of investment from China in developing
oil and gas fields inside Washington's traditional ally. At the same
time China agreed to buy $250m worth of oil from Venezuela in 2005,
roughly six million barrels.
Add to this the
reported Chinese desire for Canadian oil supplies, parts of the crumbling
Russian Yukos corporation and an audacious $13bn bid for the US oil
company Unocal.
These events have
created a strong impression in the market. Mainly that China is set
to compete openly with the US over the world's remaining oil.
The International
Energy Agency calls China "the main wild card" in forecasting
2005 prices.
It predicts that
world oil demand will increase by about 1.44mbpd in 2005 to 83.6mbpd.
But the IEA has consistently underestimated demand growth in successive
years.
With the possibility
of recession as the only market method of shorting demand and therefore
price, 2005 may prove to be another volatile year for oil. Prices of
anywhere from $35 to $55 are not out of the question.
But while producer
governments, oil majors and market traders rake in the cash, it may
be the unprepared consumer who ends up hit the hardest.