As suggested in the previous FuelWatch (May 2011), the volatility of the oil price would continue to follow the volatile geo-political events in North Africa and parts of the Middle East. These ongoing events and the pressures visited on the Euro driven by shaky economies among the EU alliance partners and the outrageous brinkmanship of US politicians in the handling of its debt crisis, provide the speculators with endless opportunities to rattle cages just about everywhere in the world.
The harsh criticism of the Organisation of the Petroleum Exporting Countries (OPEC) by the International Energy Agency (IEA) for not producing more oil to counter the weakening economic recovery was met with a mixed response. That some of the OPEC members were not willing to produce more during this time shows once again that there is a lack of common purpose among its members.
Towards the end of June, with the fragile recovery in most First World countries once again looking shaky, the IEA took an unusual step when it publicly reprimanded OPEC for not stepping up to the plate to cap the climbing price of oil by increasing production. A few days later, OPEC announced the release of 60 million barrels of oil from its strategic reserves to underpin about 60% of the loss from Libyan oil wells. The immediate impact was the rapid collapse of the oil price by almost 10%. On the back of worsening financial woes in Greece in June, the price climbed back to around $118 a barrel by early July and has generally remained around this level.
On a brighter note, the IEA released its Medium Term Oil and Gas Markets report for 2011 to 2016. Over the period, growth in demand is expected to be 1,2 million barrels a day (mb/d). The demand for natural gas is expected to grow by about 500 billion cubic metres during the same period. The report confirms the demand for oil is evermore concentrated in the transport and petrochemical segments while gas is increasingly used in power generation and heating. Oil is a global commodity and gas, while global to a degree, is key to some regions.
The IEA price assumption for oil for this year is assumed at an average of US$103 a barrel -about $20 a barrel more than last year. The higher oil price, says the IEA, unlocks new supplies from Iraq, UAE, Angola, Brazil, Canada and others. Of the increase in demand set at approximately 1,1mb/d annually, less than 40% will be for oil. The remainder will be accounted for by gas, biofuels and other unconventional oil. The US will account for the largest share of the new supplies.
The IEA report is mindful that the higher oil price may weaken economic growth and curb demand. If this happens, demand could decline by 2,4 mb/d by 2016. The IEA base case scenario for increasing oil supply could match oil demand growth with OPEC’s spare capacity maintained near current levels assuming, of course, geopolitical risks in oil-producing countries do not disrupt supplies to oil markets. However, it will be important for investment in bringing new supplies to the markets to be maintained.
Considering remedies to curb price volatility and speculative activities, the IEA report discusses exchange rates and crude oil prices and itemises some of the problems facing derivatives market regulators as they grapple with minimising systematic risk and potential market manipulation.
Also see the following FuelWatch articles in this issue:
Cleaner Fuels and Carbon Tax: Comment on the coming carbon tax on vehicles.
Biofuels Update: some different perspectives on hydrofracking for shale gas.
Out of the Spout: Abrie de Swardt’s view of going green and ways to minimise your carbon footprint.
Tips: It is time to consider the fuel cost benefits from more appropriate rear-axle ratios when they are available and suitable for the task.
Trends: An update of the fuel costs as they apply to operating and variable costs for various transport operations.