In the future, supply-demand fundamentals won't be the only oil price determinants, writes Sherine Nasr as she reviews the latest OPEC Energy Outlook The surge in oil prices from summer 2007 to June 2008 has been phenomenal. The Organisation of Petroleum Exporting Countries (OPEC) reference basket of crudes (ORB) jumped to $130 per barrel (pb) by June 2008 compared to an average of $71 pb during the same period last year. Notably, the surge in prices occurred while there has been no shortage in oil supplies. All the facts point us towards an understanding that factors other than supply and demand fundamentals are at play. A detailed analysis of the present situation is found in the recently published OPEC Energy Outlook 2008. The report gives an insight into factors affecting the international market, as well as steps that the organisation has taken towards ensuring a well-supplied market and encouraging more investment into upstream and downstream activities. Touching upon the issue of oil prices, the report stresses that an upward movement and a high degree of volatility have characterised oil prices during the past few months. The fall in the value of the dollar against other currencies, the role of the regulated oil futures and unregulated over-the-counter (OTC) exchanges played an important role in determining oil prices from June 2007 to June 2008. "Trade in paper barrels has expanded dramatically in recent years. Many believe that the proper functioning of futures markets has been altered by the various loopholes that effectively allow unlimited and undetected speculation, far beyond the limits of healthy liquidity- providing levels towards damaging price-distorting ones," the report read. In an attempt to contain an all time-high in oil prices, OPEC depended heavily on its spare capacity to keep the market well-supplied. "OPEC has increased its crude supply by four million barrels per day (mb/d) since 2003, with another one mb/d increase from its natural gas liquids [NGLs]," the report indicates. In the meantime, significant investment has been poured into the sector, in a bid to expand capacity. Over 120 upstream projects, with total cumulative capital expenditure likely to exceed $160 billion, will be completed by 2012. "These investments are expected to result in a net capacity increase by 2012 of over five mb/d from 2007 levels," said the report. While it remains difficult, even almost impossible to predict how the energy market will progress and respond to the different inter-related factors determining prices, investments and supplies, the report makes a number of assumptions with regards to economic growth, energy consumption and demands that may or may not prove likely to happen. The reference case cited by the report indicates a 50 per cent rise in energy demand between 2006 and 2030. Fossil fuels will continue to provide most of the world's energy needs, with a share of consistently over 85 per cent. Gas is expected to grow quickly, while coal retains its importance in the energy mix. "Despite the extreme high growth rates for some renewables, the rather low initial base makes the growth in absolute terms rather limited," the report read. In the same reference case, oil demand is expected to rise by 29mb/d by 2030, when it will reach 113mb/d with developing countries accounting for most of this rise. Despite the role of developing states, they will still consume, on average, approximately five times less oil per person than the generally wealthier Organisation for Economic Cooperation and Development (OECD) member countries. More oil sources will satisfy the growing demand as supply from non-OPEC member oil producers will grow to approximately six mb/d, mostly coming from Brazil, Russia and the Caspian, together with a rise in biofuels and Canadian oil sands. Meanwhile, prospects of the growing use of natural gas are underlined by the report. Over 76 per cent of the world's gas reserves are in OPEC member countries and Russia. "Growth prospects are considered to be dependant upon imports of liquefied natural gas [LNG] and the exploitation of unconventional sources to compensate for expected falls in the production of conventional gas," said the report. The report also discussed a slowing down in the process of natural gas growth in developing countries, reading: "While gas demand in developing countries is expected to be considerably stronger than for other regions, at over four per cent p.a. on average to 2030, this will be at a considerably lower rate than that witnessed over the past two decades." Meanwhile, the strong growth in gas use seen in both Western Europe and OECD countries is expected to slow down in the future. Global population growth has been underlined as one of the major factors to impact economic growth and, thus, energy consumption. The report indicated that the world's population is expected to grow by an average of one per cent per annum over the years to 2030, reaching more than 8.2 billion by that stage. More than 94 per cent of this growth will occur in the developing countries. More dramatic, though, is the fact that more people will be living in urban areas during the next 20 years. According to the report, China will set a most notable example where 200 million less people are expected to be living in rural areas by 2030. The number of city dwellers in developing countries will also swell by more than 1.5 billion over the same period. "These trends have tremendous significance for future energy demand," read the report, explaining that access to modern energy services, the corresponding decreases in reliance on traditional fuels, higher car ownership levels, an increasing role for public transport and expanding infrastructure needs will lead to heavier reliance on oil as a source of energy. Touching upon the challenges facing the downstream industry, a major question regards tightness in refining capacity and its potential implications on prices and supplies. One of the major constraints since 2000 has been the significant increase in refinery construction costs which rose by 70 per cent since then and are still rising. A second factor affecting the refining industry is the prospect that non-crude supplies are projected to rise at a faster rate than that of oil demand. "For example, the current surge in US ethanol supplies is already impacting refining economics and capacity requirements. Biofuels are projected to continue to grow," read the report, which added that the crude supply make-up and the resulting quality of the global crude slate, the level and quality of product demand seen in the move to distillates and to low and ultra- low sulphur fuels remain to be major drivers in the refining industry. "There is a lengthy list of announced projects. The question is: how much of this announced capacity will be built and, in turn, come on-stream?" the report inquired. According to the reference case posed by the report, 7.6 mb/d of new crude distillation capacity will be added to the global refining system by 2015. More than 40 per cent of the additional capacity will be sited in Asia, mainly in China and India, while those within the Middle East will start operations after 2010, with an expected peak in 2012 when around 0.7mb/d of additional capacity could come on-stream.
