Heating Oil News
Demand for Oil Set to Rise Anew
February 15, 2010
Chinese oil demand is once more growing fast, rebel militants are threatening to attack pipelines in Nigeria, and tensions are again rising in the Gulf. Recent headlines are increasingly making it seem like 2003 all over again.
In recent times, oil has taken a back seat while the world has focused on the recession. As economies slowed, oil demand fell for two consecutive years, the first time that has happened since the early 1980s.
Now, as much of the world emerges from recession and as geopolitics and threats to energy supplies return to the fore, oil consumption is expected to rebound again, driven mostly by Asia and the Middle East.
But the market is better equipped to handle the stresses this time around.
Thanks to the slowdown in energy consumption, OPEC producers now hold an estimated six million barrels a day of spare capacity, equal to roughly 7 percent of current demand, much of it in Saudi Arabia alone.
Such a cushion should shield the market from the wild excesses of the 2003-8 period, when prices rose as demand expanded, supplies fell, and spare capacity dwindled to a precariously slim level of well under two million barrels per day.
Yet considerable uncertainties remain. How fast will production drop in many of the world’s more mature regions, including Mexico and the North Sea? Will Russia surprise with another increase in its production this year? How effective will OPEC producers be in managing the market? And perhaps most importantly, how fast will demand grow?
In large part, the answer to many of these questions lies in what happens next to two countries that will be increasingly crucial in shaping the direction of oil markets well into the next decade: China and Iraq. Each captures the challenges that oil companies, OPEC producers and policy makers face in meeting energy demand and managing global supplies in the long term.
Oil prices have already rebounded from the lows they hit when the financial sector imploded in late 2008. Since last summer, prices have remained between $60 and $80 a barrel, marking a rare period of stability in an era of strong volatility. But this elevated level in the midst of a weak economy is also a reminder of the market’s fears that once growth picks up, new supplies will once again struggle to catch up with fast-growing demand.
“The big question is, what will be the speed of the recovery in the global economy?” said Harry Tchilinguirian, the senior oil analyst at BNP Paribas in London.
This year, the International Energy Agency expects oil demand to grow by 1.4 million barrels a day, to 86.3 million barrels a day, or 1.7 percent higher than last year, mostly reversing a drop of 1.3 million barrels a day in 2009 and 300,000 barrels a day the previous year.
But none of this expected growth will come from consumers in the United States, Europe and Japan. For industrialized nations, which account for 60 percent of global oil demand, energy-saving measures, government subsidies for renewable fuels and declining populations mean that oil demand is unlikely ever to grow again.
“We’ve really hit peak demand in developed nations, and so the name of the game now is China,” said Daniel Yergin, the chairman of IHS Cambridge Energy Research Associates. “In terms of the dynamism of the market, the vector of demand will be China and the dynamo of supplies is Iraq.”
More than ever, what happens in the next few years to China will be central to the direction of the oil markets. From 2003 to 2008, more than half the growth in oil demand came from China, according to analysts at Raymond James. Even last year, when demand in most of the world shrank, China was the only major economy to see strong growth, with its oil consumption rising 5.7 percent. This year, analysts expect Chinese oil demand to grow at an even faster pace.
In 2009, more cars were sold in China than in the United States, something most analysts did not expect to see before 2018 or 2020, said Mr. Yergin. If China continues at its current pace, he said, it will be consuming more oil than the United States by the end of the decade.
“That will happen unless they step up on the gas in terms of energy efficiency and electric cars,” Mr. Yergin said.
At the Davos conference in January, Tony Hayward, the BP chief executive, summed up the industry’s sentiment: “The challenge is how to actually meet this growing demand for oil and to keep the lid on prices.”
Skip to next paragraphThis year continues to be a difficult one for oil producers. “We are not assuming that there will be a quick recovery, and the outlook for 2010 is uncertain,” Peter Voser, the chief executive of Royal Dutch Shell, said this month as the company reported a steep drop in profit for the quarter because of losses at its refining business.
Despite the slowdown, major oil companies are not significantly cutting into their exploration and development spending. Exxon Mobil, for example, said it is on track to spend between $25 billion and $30 billion a year for five years to find and develop new oil and gas projects around the world.
But companies have been finding it increasingly difficult to increase their oil production from older fields. Major new fields are being developed in Brazil and in Kazakhstan, but they will not begin producing before 2015 at the earliest. Elsewhere, few countries are expected to see big increases in production.
However, the opening of Iraq’s oil fields to foreign investors could provide a watershed moment for the industry. Most international oil companies, who were initially skeptical of the terms on offer, have flocked to Iraq. For companies like Shell and Exxon, no other country now offers such a chance to expand reserves.
“Iraq’s return changes the market’s dynamics,” said David Kirsch, an energy analyst at PFC Energy, a consulting firm in Washington.
The government aims to raise output rapidly and to rival Saudi Arabia by the end of the decade, with production increasing to 12 million barrels a day, from about 2.4 million barrels a day currently.
Petroleum executives do not believe in this optimistic scenario. In private, they point to Iraq’s lack of pipeline infrastructure and export terminal capacity to accommodate such a rapid growth, and a shortage of workers with the skills to sustain the planned ramp-up in production. And though the security environment has been getting better, there remains huge uncertainty about the country’s political stability.
But if Iraq and its foreign partners manage to increase production by just 1.5 million barrels a day over the next five years, a modest but possibly achievable target, that extra output would greatly relieve the long term pressures that pushed oil prices into triple-digit territory just a few years ago. Even at these relatively low levels, Iraq would account for half of the expected growth in oil needed from OPEC producers, Mr. Kirsch said.
The return of Iraq to the oil scene — which could still be derailed — would also mark a new phase within OPEC, which would have to accommodate Iraq’s extra production in coming years.
This is a problem that OPEC officials are not eager to tackle.
Abdullah al-Badri, the group’s secretary general, recently said, for example, that there would be no need for an Iraqi oil quota for another five years.
For the time being, much of the management of oil prices remains in the hands of a few countries, led by Saudi Arabia, that must increasingly counterbalance the return of geopolitical threats, including more disruptions to Nigerian oil exports.
“There is the potential for politics to play a bigger role this year — but that is always the case,” said Jan Stuart, the global oil economist at Macquarie Capital in New York.
In Nigeria, the militant group Movement for the Emancipation of the Niger Delta announced on Jan. 30 that it was ending a short-lived cease-fire in the region and warned oil companies to halt their operations, vowing an “all-out onslaught” on their installations. “Nothing will be spared,” the rebels said.
The standoff between the West and Iran also continues slowly to escalate. At the end of January, the United States sought to ratchet up the pressure, as a prelude to a tougher diplomatic stance, by sending more missiles to the Gulf.
Yet another worry, said Greg Priddy, an oil analyst at Eurasia, is what might happen to economic growth once various stimulus plans start to dry up.
That is a particular concern for Saudi Arabia, he said. “The Saudis want to moderate any price increases right now, and are worried about the dangers of a double-dip recession,” he said. At the same time, “they also want to keep prices where their budget would be at a surplus and Iran is at a deficit, in order to keep pressure on Iran.”
