May 26, 2024

Little Relief Seen From High Oil Prices

PARIS — Depending on your standpoint — industry, producer or consumer — the current elevated oil price might be caused by speculation, political instability or stronger demand for fossil fuels from improving growth.

But as the speakers at an oil conference in Paris demonstrated Wednesday, few people are willing to bet that the price of crude will fall drastically in the near term, given the confluence of factors supporting prices.

“Demand plus costs are increasing — tell me how you could see a reduction in oil prices?” said Christophe de Margerie, the chief executive of the French oil company Total. “We’d be very happy to see an oil price going back to $80, but I don’t believe it.”

In London, Brent crude oil from the North Sea for May delivery was trading at $121.70 a barrel late Wednesday, up 28 percent since the end of last year and higher in particular since the conflict in Libya removed a large portion of that country’s 1.6 million barrels of crude production a day of the market.

That fact that Saudi Arabia and the Organization of the Petroleum Exporting Countries have committed to make up the difference has failed to cool prices.

Mr. de Margerie said oil prices were being buoyed by the concerns about political stability in the Middle East and worries about the future of nuclear power as a result of the effects of the earthquake and tsunami in Japan last month. “Short term, there’s enough capacity available,” he said. “But for the long term the best way we can avoid rising prices is investment in projects, nonconventional energy and reducing consumption in all countries.”

His group plans to invest €5 billion, or $7.2 billion, by 2020 to develop new energy sources, including solar power and biomass.

Baseline forecasts suggest that global demand for oil will rise to 106 million barrels a day by 2030 from 86 million in 2010, about one million barrels a day each year.

Hussain al-Shahristani, Iraq’s deputy prime minister for energy, said his country would help to feed the demand. “Much of the country remains unexplored,” he said. “There’s a very high probability of new discoveries in the near future.”

Iraq will soon announce its plan to auction of oil and gas exploration licenses for 12 blocks, he said, its fourth since the new government was installed after the demise of the regime of Saddam Hussein.

Iraq currently has 143 billion barrels of proven reserves, excluding the semiautonomous Kurdistan region, and a goal of increasing production several times, to 11 million barrels a day over the next decade, which should be seen as “an assuring buffer for world oil supply in the coming decades,” Mr. al-Shahristani said. He attributed the recent “gigantic price movements” on “the underlying global economy rather than the pure fundamentals of the crude oil market.”

“Oil prices have been surprisingly insensitive to supply and demand,” he added. “Volatility in oil prices have been more due to speculation in futures market and political instability, as in the case of Libya.”

The price of oil should be above the lowest level that allows for profitable new investment and below a level that is so high that it impedes growth, he said, adding that oil companies tend to believe that anything under $60 or $70 a barrel would dissuade new projects.

“So far we have not really seen any serious impact on world growth” from current oil prices rates, he said.

Mohamed bin Dhaen al-Hamli, the energy minister of the United Arab Emirates, said, “Financial oil markets are choosing to ignore market fundamentals preferring to bet on a worst-case scenario, leading to an increase in oil prices.” OPEC members will provide “the necessary crude and committing the required investments” to support growth, he said, adding “there is little we can do in terms of price control which is set by the international market.”

He said that the U.A.E. remained committed to investing in nuclear power despite events in Japan and would proceed with plans to build four nuclear reactors to generate power in coming years.

He pointed to “speculation” as playing an important role in bidding up prices recently.

Rilwanu Lukman, a former president of OPEC and a former oil minister from Nigeria, said oil was still “a cheap source of energy” in historical terms. “The crude price is not responsible for the problems we have in the world economy,” he said. “The real cause of the problem is heavy taxation, which some of the consumer countries impose on their nationals.”

European countries refuse to examine this issue because of the revenue its brings them, he said.

In the meantime, investors appear to be assuming that elevated prices are here to stay. Serene Lim and Mark Pervan, analysts at the bank Australia New Zealand Group, on Wednesday pushed up their forecast for Brent crude prices to $128 a barrel by the end of the first half. “We believe that the geopolitical risk premium is here to stay, at least the rest of this year,” they wrote in a research note.

The French industry minister, Éric Besson, said his country’s presidency of the Group of 20 leading economies, which runs through 2011, would work to improve transparency of oil supply data and strengthen market regulation to “prevent potential manipulation.”

He said that the development of derivatives had gone beyond simply covering risk, which had been their raison d’être.

Didier Houssain, director of energy markets and security at the International Energy Agency, which primarily represents industrialized nations, emphasized there was no “fundamental” reason for prices to rise as high as they did in 2008, when they neared $150 a barrel.

“It’s not a repetition of 2008 because there is some slack in the market,” he said. In 2008, there was a real problem of supply and demand given an unforeseen surge in demand from China. “This year everyone sees demand at a lower level and growth in demand is lower,” he added. “We are not too worried — if we strip out the geopolitical factors.”

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