Fear
Of Shortages Behind
High Oil Prices
By Firas Al-Atraqchi
23 September 2004,
Aljazeera
Walid Khadduri, editor of Middle East Economic Survey (MEES), believes
fear of oil shortages in the future is behind the upsurge in today's
energy prices.
Born in Baghdad
in 1942, Khadduri received a bachelors degree in social science studies
from Michigan State University in 1963 and graduated from The Johns
Hopkins University School of Advanced International Studies (SAIS) in
1972 with a PhD degree in international relations.
He joined MEES in
1981 after serving for seven years as the director of information and
international relations at the Organisation of Arab Petroleum Exporting
Countries (OAPEC) in Kuwait. He was also a member of the political science
department at Kuwait University (19731975) and prior to that served
as director of research at the Institute for Palestine Studies in Beirut
(19701973).
Firas Al-Atraqchi
: The price of a barrel of oil reached $49.40 at one point in mid-August,
with some analysts speculating that it would eventually breach $50.
Last week, Venezuela's President Hugo Chavez suggested that the price
might well reach $100 soon. What is fuelling the upsurge in oil prices?
Walid Khadduri:
It is futile to speculate about how high or low oil prices will be in
the near future. It all depends on supply and demand, as well as industrial
and political factors. The current rise in prices is attributed to the
high demand for energy as a result of the buoyancy in the world economy,
particularly in the US and China.
Moreover, there
have been almost weekly incidents that have disrupted supplies: sabotage
of pipelines in Iraq, terrorist attacks in Saudi Arabia, the Yukos affairs
and the disruption of exports to China, for example. Natural disasters
such as the hurricanes in the US Gulf of Mexico and fires at refineries
also play a role.
What we have today
is high demand coupled with disturbing political factors in the Middle
East and elsewhere, as well as bottlenecks in the oil industry whether
in the upstream or the downstream with refineries and shipping.
However, despite
all these factors, the fundamentals do not indicate that price should
be this high. There are no physical shortages today, and companies are
being given what they ask for. What is keeping prices high today is
the fear that there will be shortages in the future, for one reason
or another.
Many analysts have
brushed off any hopes of a plunge in oil prices with or without OPEC.
Some OPEC members have expressed the hopes that the price of a barrel
would settle at $22-28, but market factors seem to indicate that is
unachievable. Is OPEC out of touch with market realities or are they
just paying lip service?
OPEC has not lost
touch with reality. The reason the organisation still holds to the price
band of $22-28 a barrel, OPEC basket price, despite current high prices,
is the fact that it is not sure yet to what level it should change it
to. As it is not clear yet where the new price level will settle at,
and be sustained for a reasonable period of time, OPEC thinks that it
is better to retain the price band as it is until the market can sustain
a new price level.
In fact, analysts
are making too much of a deal of the price band. What OPEC is focusing
on is providing the market with what it needs of crude oil. This is
the paramount factor in its strategy and it is meeting that challenge.
The second priority for OPEC is to retain a spare production capacity
for emergencies, whether they are of an industrial or political nature.
Accordingly, we have around 1-1.5 million bpd of spare capacity, mainly
in Saudi Arabia. This is not much, but that is what is available at
the present time.
Of course, if it
is necessary, the industrial countries can use their strategic reserves
in times of emergency.
Oil prices are determined by market forces, not the OPEC price band.
OPEC member countries price their crude in relevance to the daily evolution
in Brent and WTI prices in the North Sea and the US, respectively. The
function of the price band is to assist OPEC member states attain a
reference price for their revenues. It is not a market reference.
With political and
military instability in Iraq, is it likely we will ever see an end to
attacks on the oil infrastructure? Is there a reason that almost on
a daily basis we see attacks on oil pipelines? Can Iraq's oil infrastructure
be protected?
The Iraqi Ministry
of Oil is doing its best to protect the country's infrastructure from
sabotage and destruction. Unfortunately, the company that was awarded
the security contract in 2003 was unable to draw the right plans for
this big challenge.
Meanwhile, Iraqi
oil production and exports will continue to face destruction as long
as the country lacks security. The one is the function of the other.
It is not difficult to target pipelines as there are about 6000km of
lines throughout the country.
Moreover,
the insurgents target the oil industry because it is vital to the domestic
system (power, refineries, etc), and as the country's main foreign exchange
earner. Iraq today earns about $50-60m per day. The attacks will continue
as the target is vital to the country's survival and wellbeing.
Does the current
upsurge in oil prices seem to hint that hybrid fuel economies will emerge?
Will industry move to further fund research and development in this
sector?
The current high
oil prices today are not driven by shortage of supply, but by high demand
for petroleum products. The demand for oil is mainly in the transportation
sector and in the petrochemical industry. While there are alternatives
available, such as fuel cells and alcohol, industry sources indicate
that the alternatives will not chip away from oil's share in the world
energy basket for years to come, perhaps decades.
There are about
600 million vehicles in the world today. A decade ago, China used to
have around 80 million bicycles. Today China is producing tens of millions
of new cars a year. So far all these cars use gasoline or diesel.
As long as this is the case, the demand for oil will continue. The problem
with fuel cells is that they are expensive, require hydrocarbon and
are not as friendly to the consumers as the combustion engine car. Until
all these factors are dealt with, the demand for oil will continue to
rise.