OIL: Prices Dropping But Bound to Remain Sky-High

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Apr 8 2005 (IPS) - Crude oil prices have been dropping in recent days in reaction to reports of higher inventories in the United States, the world’s largest consumer, but they have still not dipped below the 50-dollar-a-barrel mark crossed back in February.

Moreover, long-term prospects point to sustained high prices, due to growing demand from China.

In New York, the price of West Texas Intermediate (WTI) light, sweet crude had fallen to 54.11 dollars a barrel on Friday, after reaching a new record high of 58.28 dollars on Monday.

Meanwhile, in London, the price of Brent North Sea crude – the European benchmark – dipped to 53.20 dollars a barrel, down from 56.35 dollars at the start of the week.

The weekly averages were 56.02 dollars a barrel for WTI, 55.45 dollars for Brent North Sea crude, 47.37 dollars for Venezuelan crude, and 51.98 dollars for the Organisation of Petroleum Exporting Countries (OPEC) basket of seven crudes, reported the Venezuelan Ministry of Energy.

When the WTI price climbed above 58 dollars a barrel, U.S. Treasury Secretary John Snow expressed alarm. "We’re not an economy geared to 60-dollar (a barrel) oil," he commented.

The organisation, made up of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela, currently produces 29.9 million barrels of oil daily, which represents 36 percent of global demand.

Ten of the OPEC countries – all of the members except Iraq, which pumps around two million barrels a day – have adopted quotas and gear their production caps to market activity. In March they agreed to an increase of 500,000 barrels a day, although according to experts, extra production has only reached 238,000 barrels so far.

"OPEC is reaching its production limit," warned Venezuelan Energy Minister Rafael Ramírez, pointing to estimates which indicate that the organisation cannot extract more than 31 million barrels a day.

For his part, Indonesian Energy Minister Purnomo Yusgiantoro said his country is already producing at 95 percent of capacity.

Nevertheless, Kuwaiti Energy Minister and OPEC president Ahmed al-Sabah reported that discussions had begun regarding a possible half-million-barrel daily increase in output, although he added that "we have to wait to see exactly how" prices behave in the next two weeks.

Crude oil inventories in the United States rose 2.4 million barrels to 317 million barrels in late March, a level last seen in July 2002.

But while that is high above 270 million barrels – the so-called operating minimum, equivalent to 15 days of consumption – it is not sufficient to calm the jitters of a market exposed to unforeseen contingencies while global demand continues to grow unabated.

According to the International Energy Agency (IEA), which comprises the industrialised member countries of the Organisation for Economic Cooperation and Development (OECD), this year’s worldwide oil consumption will rise to 84.3 million barrels a day from last year’s figure of 82.4 barrels.

Meanwhile, International Monetary Fund chief economist Raghuram Rajan said this week that "The oil market will remain tight in the coming years, and high and volatile oil prices will continue to present a serious risk to the global economy."

"To the extent that there is some kind of a supply disruption, 100 dollars a barrel does not seem outlandish," commented Rajan, although he noted that it was not "the most likely scenario."

IMF estimates point to a worldwide oil demand of 140 million barrels a day in the year 2030 (even higher than the 120 million barrels predicted by an IEA study last year), while the Association for the Study of Peak Oil and Gas maintains that the planet cannot produce much more than 100 million barrels a day.

A large part of the increased global demand will come from China. While there are currently around 22 or 23 million motor vehicles on the road in the Asian giant, or roughly 16 per 1,000 population, the ratio is predicted to rise to 270 per 1,000 inhabitants by 2030, for a total of 390 million vehicles.

China will then account for one quarter of the world’s oil consumption – the same proportion currently represented by the United States.