OPEC faces a difficult year.
OPEC MINISTERS ARE looking for continued support from non-OPEC oil producers this year in their efforts to stabilise oil prices and ensure global economic recovery. But their success will also be affected by how severe the current downturn is, how long it lasts and whether their unity can be maintained this year if, as some officials expect, world oil demand not only stops growing but actually falls.
"We realise that in the first quarter of 2009 we are probably going to have a decline in global oil demand, and in the second quarter we are going to have a big decline," OPEC's President, Chakib Khelil of Algeria, said at the end of November. Referring to the organisation's meeting in Cairo that month, he added that OPEC ministers had "taken note of the serious deterioration in the world economy and its serious consequences for the oil price."
While OPEC was widely expected to have agreed a significant cut in production at its mid-December meeting in Algeria, industry experts say that it is not at all clear that this will boost oil prices over the coming months, nor that it will stabilise demand if the current recessions in the US, Europe and Japan worsen. "OPEC is dealing with tough circumstances, the toughest in ten, if not 30 years," commented Raad Al Kadiri of Washington-based PFC Energy.
"Energy demand depends on how protracted the decline turns out to be," observes analyst Bill Farren-Price of New York-based Medley Global Advisers. "If it looks like the global slump will get worse than currently expected, energy demand will fall further." If so, according to other analysts, total production cuts of up to three million barrels a day this year may be needed from OPEC to stabilise oil prices.
Data recently released by the US Energy Department showed that US demand in September, the last period for which figures are available, plunged by 2.6m to 17.7m barrels a day (b/d), a drop of nearly 13 %. That marks the lowest monthly level of demand in the world's largest oil-consuming country since October 1995.
Analysts at the big US investment bank, Merrill Lynch, are also estimating that overall demand will fall this quarter, the first global decline in almost 25 years. The International Energy Agency (IEA), which advises the world's developed economies, has cut its forecasts for 2009 by just under 1%, to 86.5 m b/d, following weaker economic estimates for this year, which were announced by the International Monetary Fund in late 2008.
The IEA report explained that its downward revision was "very much related to the drastic worsening of global economic conditions over the past few weeks, as a result of the ongoing financial crisis. Emerging and developing economies," it added, "will also suffer the consequences of the slowdown." Since then, some leading international analysts have said they do not expect a full global recovery before 2011.
Crude oil prices during the three months to the end of March, Merrill Lynch estimates, could bottom out at an average of just $43 a barrel. Other investment and industry analysts at Deutsche Bank and at the China National Offshore Oil Corporation have predicted an average price of $40, or even lower, as the downturn spreads from the developed countries to China and other emerging markets in Asia. In New York, the oil futures contract for January settled below $50 a barrel, its lowest level since May 2005.
While OPEC accounts for 40% of the world's oil output, the price and supply of crude is also affected by other large non-OPEC producers, particularly Russia, Mexico and Norway. OPEC's Secretary General, Abdalla Salem El Badri told The Middle East in October that he was optimistic that Moscow would cooperate with OPEC to help stabilise prices. President Muammar Gaddafi of Libya has also referred to "a common vision of energy policy" with Russia, the world's leading oil producer along with Saudi Arabia.
In early December, El Badri revealed that both Mexico and Norway had already decided, by themselves, to lower production. Talks were also continuing with Russia, he added, on similar moves, even though some industry experts say that given the wintry conditions in many Siberian oilfields, closing down wells could have an adverse impact on Russia's future output. Nevertheless, given estimates that Russia needs an oil price of at least $70 a barrel to balance its budget, some action is expected even if this does not take the form of a direct public participation in OPEC's current decision-making.
For OPEC itself, differences in members' population, economies and societies are beginning to make themselves felt, especially as the oil price has fallen by two thirds since its peak of $147 last July. Poorer countries with large populations, such as Nigeria, Algeria, Iraq, Iran and Venezuela need a high price to support their budgets and avoid incurring deficits. For 2008, this amounted to a figure of $111 for Iraq, $94 for Venezuela, $90 for Iran, $77 for Oman, $75 for Bahrain and $56 for Algeria, according to estimates published by the IMF and PFC Energy. For the main Gulf producers--Saudi Arabia, Kuwait, Qatar and the UAE, as well as Libya, a price above $50 would provide a budget surplus.
Chris Theal, Head of Research for the Calgary-based energy investment dealer, Tristone Capital, said late last year that "There is a growing gap between what the required oil price is to balance the budget and where we are at. Iran and Venezuela," he added, "are clearly in unsustainable territory. Venezuela's President, Hugo Chavez, has already said that he wants oil prices to range between $80 and $100 a barrel, while OPEC's El Badri says he would like $70 to $90. Saudi Arabia's King Abdullah is reported to consider $75 to be a "fair" price.
Another dilemma for OPEC stems from the fact that while higher oil prices are needed to fund their members' budgets, any move to shore up prices could also lengthen the recession in the US, Europe and Japan, and further reduce demand. The US Federal Highway Administration has reported that Americans drove 90bn fewer miles in the first 11 months of 2008. While petrol prices have come down significantly in the US since the summer, and were averaging under $2 a gallon late last year, Americans still cut back sharply on their driving over the long Thanksgiving holiday, according to some estimates, just as they had done in the summer and early autumn when petrol prices, in some areas, topped $3 a gallon.
Even more important for OPEC, and for the international oil companies as well, a low oil price leads to significant cutbacks in future expansion plans, a development that, according to some experts, is already raising the possibility of a sharp rise in oil prices after 2012 or 2013, as world economies start to recover in earnest, and global demand escalates.
Dan Lewis, research director at London's Economic Research Council, recently said that an "oil crunch" is looming, a result of oil exploration projects being shelved during the current global economic crisis. "Investment had dropped off," he said, adding that "this really matters ... because the gap between geological discovery from that investment and bringing it to market is ten years. Ironically," he added, "we are getting closer to that oil crunch simply because of the economic crisis we are in now."
His words followed warnings by OPEC ministers last autumn that many of their plans to expand oil and gas output may have to be put on hold if the crude oil price continued to fall. "We need an adequate, reasonable oil price that will continue to stimulate investment," the UAE's energy minister, Mohammed Bin Dhaen Al Hamli said in October. "I think this is really a crisis situation and I think it is very difficult to predict what is going to happen. It's extremely difficult ... to finance expensive projects."
The IEA has also warned that low oil prices and the lack of global liquidity to finance new hydrocarbon exploration and production are causing concern about future supplies and prices. "We hear almost every day about a project being postponed," commented the Agency's chief economist, Fatih Birol. "This is a major problem."
The IEA maintains that the average oil price needs to be significantly higher than in the past five years to encourage the development of new fields that are more costly to exploit, such as Canada's tar sands, Siberian oilfields and deep-sea offshore reserves, as well as the construction of much-needed new oil refineries. Without these developments, rising demand from China, India, the Middle East and other emerging economies in coming years could push the oil price to new peaks above the $147 reached last year, other analysts say.
Estimates by Cambridge Research Associates are that as much as four million barrels of future oil-productive capacity could be jeopardised if prices remain below $60 a barrel. Other analysts say that figure could be even higher if the figure averages less than $50 a barrel, as some expect for this year. Given that OPEC's El Badri has suggested that the price of crude will not begin to rise consistently before the end of June, and possibly much later, the prospect of a sharp drop in oilfield investment by both OPEC and non-OPEC producers is beginning to look increasingly likely.