2013-06-19 10:05:19
Are high oil prices here to stay?
Jun 15th 2013 |From the print edition
SCRATCH the surface of the planet and the chances that hydrocarbons will spew
forth appear to grow by the day. This week America s Energy Information
Administration (EIA) released new estimates of the amount of gas in the world s
shale beds. It reckons that there are 7,299 trillion cubic feet, 10% more than
its 2011 estimate. The EIA s estimates for shale oil, not included in the 2011
numbers, are a staggering 345 billion barrels, adding a tenth to the world s
total oil resources.
Shale oil is already gushing out of the ground in America, displacing imports
to the world s largest consumer. New supply is not yet showing up in prices:
Brent crude, the global benchmark, sells for $103 a barrel after averaging $111
in both 2011 and 2012. But Paul Stevens of Chatham House, a think-tank, is
among those who see parallels with the price crash of 1986 caused when high
prices hit demand and brought forth new sources of supply from the North Sea
and Alaska. Are they right?
The most notable recent price surges were rooted in supply shocks in a
fractious Middle East. Arab-spring uprisings culminated in the loss of Libyan
crude from the markets in 2011 after the outbreak of civil war. Brent hit $127
a barrel. Markets back then were tight. Demand was brisk in emerging markets
and even small supply disruptions had a disproportionate effect. A slowdown in
China and the euro crisis have since dampened global thirsts. Forecasts see
relatively weak demand growth of around 800,000 barrels a day (b/d) in 2013, a
little slower than in 2012.
Saudi Arabia has the swing vote on the oil price. It is happy with oil at
around $100 a barrel. The world economy seems able to cope with prices at that
level, which also deliver the revenues needed to buy off restive populations.
Saudi Arabia boosted output last year to offset any Iranian shortfall as
sanctions took hold. Since then, as Libyan crude came back onto the market and
supplies of shale oil from North America expanded by at least 1m b/d, the
Saudis have cut output by 700,000 b/d. These cuts, and the start up of the
Manifa field earlier this year, means that spare capacity, the amount of
production that can quickly be brought on stream, is building.
This might prove useful. Oil markets seem to have forgotten about political
risk in the Middle East. According to Energy Aspects, a consultancy, the
geopolitical premium is extremely low . Yet Iran s elections and its nuclear
ambitions, Syria s civil war and growing violence in Iraq suggest that plenty
of risk remains.
As for those new sources of supply, outside America shale additions in places
like Brazil, Kazakhstan and Iraq are set to disappoint. And Christof R hl, BP s
chief economist, points out that in the 1986 oil-price slump demand was
actually falling yet producers did not want to shut down vast projects in the
North Sea and Alaska; instead they attempted to cut costs and carried on
pumping. But shale oil is extracted using hundreds of small wells, so scaling
back output is far easier if prices fall. Motorists hoping for some rapid
relief from high oil prices may be out of luck.