By Syed Rashid Hussain
The OPEC domination of the global energy markets is set to grow, says BP in its just released BP Energy Outlook, and it made headlines all over the globe, sending shivers through some spines. The outlook underlined that world is entering an era of OPEC dominance over the markets.
BP’s forecast shows that over the next 20 years OPEC will become as powerful as it was in its golden years in the 70’s — in the immediate aftermath of the 1973 Arab oil embargo. BP Energy Outlook 2030 predicts that the OPEC would see its market share rise to 46 per cent from the current 40 percent, over the coming two decades — “a position not seen since 1977.”
With 75 percent of growth in global oil reserves over the next two decades, to come from OPEC nations, Kuwait, Iran, Angola, Libya, Saudi Arabia, Iraq and Nigeria, its market share is bound to go up.
With global oil demand rising after two years of declines, and economic growth supporting firmer crude markets, output cuts made by OPEC are rebalancing the market in its favor. OPEC’s market clout is bound to be strengthened further, as record-high global inventories are poised to drop, shifting price-influencing power back from consumers to the producers.
And now, with unrestrained non-OPEC oil-output growth slowing, global inventories are set to slide, making OPEC a much more potent market force than in recent times.
The BP Energy Outlook also confirms that the world will need to explore in remote regions, like the Arctic and deeper water than ever before, if it is to keep pace with a 1.7 percent annual rise in consumption — a 39 percent increase over 20 years, to about 102 million bpd by 2030, an increase of 16.5 million bpd from today’s level.
Saudi Arabia should be able to add another 3 million barrels, and the output addition from Iraq is to be significant too, from the current 2.5 million bpd to 5.5 million bpd.An additional 2 million bpd of production should come from Canada’s controversial oil sands, while biofuels made from corn or sugar are predicted to provide a huge 5 million bpd.
The BP projections make it clear that oil will probably be the slowest growing source of energy, with huge extra demand for renewable, gas and coal also adding to pressure on the world’s resources. Oil is currently the dominant source of world energy, closely followed by coal, on which China is dependent for much of its industrial fuel.
OPEC seems back in the driver’s seat. Is it really that bad a news for the consumers? Does it really mean a return to runaway, record-high oil prices? Are we going to get back to the era, where oil was a political tool, in the hands of a few idealists? Could the producers, including even the hawks in its ranks, sustain without the regular inflow of petrodollars?
Too many questions indeed, yet the fact remains, times have changed. Producers, in the current changed circumstances, desperately need regular cash inflow from crude sales. They cannot sustain without it.
Indeed there is a tussle in the rank of the producers’ too. Conceded, some do try and capitalize on the woes of market, for they have their eyes on short term gains. Yet there are others, and who wield much more power than the hawks, who perceive of themselves as a long term players in the market. They have reasons to look far ahead. After all they don’t want to kill the golden egg laying goose. Markets need to be sustained and nurtured. And trying to maximize the immediate returns hurts this possibility in the longer run. Markets need to be in a band that provides not only, fair and ample returns to the producers, but also ensures demand security in the longer run. And if the prices get too high, the possibility of demand destruction with alternatives taking over a considerable share of market does persist. Long term players are definitely alive to such consequences.
Thus despite the growing clout of OPEC, many analysts see Saudi Arabia as moderate on prices, asserting itself within the group by virtue of its holds on nearly all of the world’s idle production capacity. Adam Sieminski, an analyst at Deutsche Bank, sees “the strong, sensible hands” of Saudi Arabia, bringing more oil back to the market while maintaining an adequate supply buffer to keep prices from surging back toward the record $150 a barrel in the near term. “If the world is showing economic growth of more than 4.5 percent, oil at $100 a barrel may be just fine,” is the message that OPEC may take from the unfolding market outlook, says Sieminski.
And there is another twist to this entire debate too. Guy Caruso, who too should be in Riyadh late Sunday, and his erstwhile colleagues at the EIA, needs to look at these more closely. Even if OPEC is heading to dominate this market — a development some of my friends are fearful of — the fact remains that the US dependence on imported fuel is lessening with the passage of time. While BP underlines the growing OPEC clout, interestingly it also points out, “at the same time oil — and gas — import dependency in the US is likely to fall to levels not seen since the 1990s. And this would be achieved because of improved fuel efficiency, the shale gas revolution and the increased share of biofuels.”
A new report by Accenture also forecasts a reduction in gasoline demand in the US by 22 billion gallons a year by 2030. The report adds if vehicle miles travelled (VMT) remained roughly the same as today; the US could cut crude oil imports by 1 billion barrels per year, a 34 percent reduction from the 3.3 billion barrels imported in 2009.
In the meantime, brushing aside the Peak Oil theorists, Iraq and Venezuela are now claiming to have considerably larger reserves than earlier thought. As per, Iraq’s Oil Ministry’s official spokesman, Assem Jihad, Iraq’s oil reserves have now touched 500 billion barrels. “The size of Iraq’s oil reserves has reached about 500 billion barrels nowadays, whilst the previous oil reserves had reached 143 billion barrels,” Jihad said, adding that the above increase represent the 64 oil fields only.And Venezuela is also claiming to have overtaken Saudi Arabia as the world leader in oil reserves with certified deposits leaping to 297 billion barrels at the end of 2010, President Hugo Chavez’s government said last week.
Energy Minister Rafael Ramirez told Reuters that the new reserves, which pushed the total 41 percent higher than the previous year, were booked in the vast Orinoco extra heavy crude belt. A year ago, the US Geological Survey also reported that the Orinoco belt held some 513 billion barrels of crude that could be recovered. And these are besides, Brazil’s deep water fields or Canada’s tar sands.And indeed, Russia’s 2011 oil output could touch a new post-Soviet record. Russia is likely to produce 10.258 million barrels per day of crude in 2011, about 1.1 percent up from 2010. Indeed there is no dearth of party spoilers too.
And after all, the OPEC domination, even if a phase in passing, may not be as bad for the world as perceived by some in western capitals, one could say with some hindsight indeed. Producers are in no mood to do hara-kiri (suicide). They too are sensible!
NUTSHELL:
I fimnd this article particularly interesting as we are currently focusing on oil prices and OPEC. In the previous post, Ademola gave us an insight into the world perception of OPEC as a cause of price volatility and general upward trend in prices. This article has been selected because it is authored in Saudi Arabia (the heart of oil price stability)and clearly underscores the salient points mentioned in the previous article. It also serves as a platform on which to build with Ademola's second analysis (coming up shortly) on global market reactions to the changes in price. According to Syed the fundamentals of the market- as captured by the BP report suggest that - in spite of the slower growth in world oil consumption - the oil producer nations are in for a treat. If you are in the passenger's seats of this car, you want to buckle up because it is going to be a bumpy ride.
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