prospects for oil prices - scottish oil club · prospects for oil prices professor paul stevens...

Prospects for oil prices

Professor Paul StevensCentre for Energy, Petroleum and Mineral

Law and PolicyUniversity of Dundee

Scotland

Scottish Oil ClubNovember 9th 2006

Edinburgh

PRESENTATION OUTLINE

• Why is the oil price currently high?

• What are the short term prospects?

• What are the medium term prospects?

• What are the long term prospects?

Why are oil prices currently high?

MONTHLY OIL PRICES - OPEC BASKET 1983- October 2006

01020304050607080

1983

1986

1989

1992

1995

1998

2001

2004

In June 2005, the basket changed its composition moving to heavier crudes

US$

per

bar

rel

IN 2004 DOLLARS THE PRICE IN 1980 AVERAGED $87.65 (Brent)

Why are oil prices high?

Unexpected demand increase

driven by exceptional GDP growth

plus constrained supply

Why are oil prices high?

Unexpected demand increase

driven by exceptional GDP growth

plus constrained supply

BUT it is not only China who got greedy. There is another culprit ??

Unexpected demand increase driven by exceptional GDP

1996-2004 total growth in demand China 3.4 Mbd USA 3.0 Mbd

Wordl Oil Demand 1995-2007

-500

0

500

1000

1500

2000

2500

3000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

thou

sand

bar

rels

per

day

CHINA USA REST AVERAGE OF 8 FORECASTS

Source: 1995 – 2005 BP Statistical Review of World Energy 2006

Unexpected demand increase driven by exceptional GDP growth plus constrained supply

In addition to increased demand for wet barrels there is also anincrease in demand for paper barrels

-Speculation from concern about geo-politics and the “Money Managers” moving into commodities

-But there is a real change in the market attitude to the future of oil prices reflected in the forward curve

Change in the market attitude to futures prices. Driven by ….

TIME CURVE

0

10

20

30

40

50

60

70

80

1 2 3 4 5 6 7

YEARS TO DELIVERY

OIL

PR

ICE

$ PE

R B

AR

RE

L

Oct-06Feb-06Nov-05SUMMER 2004THREE YEARS AGOFIVE YEARS AGO

Source: NYMEX

Unexpected demand increase plus constrained supplySupply constrained by geo-politics, hurricanes plus delays to

Non-Opec projects

Non-OPEC Production growth 1997-2007

-500

0

500

1000

1500

2000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007thou

sand

bar

rels

per

day

NON-OPEC FSU AVERAGE OF 8 FORECASTS

Source: 1997-2005 BP Statistical Review of World Energy 2006

AND there are refinery constraints increasing the price of light sweet crude

REMEMBER light-sweet crude provides the headline price – WTI/Nymex and Brent/ICE

• XXX

Crude Oil Price Differentials

25

35

45

55

65

75

85

Jan-

04 apr jul oct

Jan-

05 apr jul oct

Jan-

06 apr jul

$ Pe

r bar

rel

wtidubai

What are the short term prospects?

• Current inventory overhang– Role of the near term contango– What is OPEC’s price target and can they defend it?

• Immediate downside risks– Demand collapse

• Immediate upside risks– Sudden supply loss – Iran (plus Iraq); Nigeria; …..– Geo-politics and paper markets

What are the medium term prospects?In the past high oil prices resulted in …

• Recession reduced demand

• Improved appliance efficiency and fuel switching reduced demand

• Increased supply because of greater ability and willingness to invest by producers

• Thus less consumption plus greater supply = oversupplied market and prices fall – Markets work! But in the new world????

BUT IN THE NEW WORLD: Doubts over demand destruction?

• Range of uncertainty over 2007 – Average 1.4 mbd Range 1.0 to 1.9

• Little sign of global economic slow-down although there are concerns

• In the OECD all the easy fuel switching and improved oil efficiency has been done

• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s.


-500

0

500

1000

1500

2000

2500

3000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

thou

sand

bar

rels

per

day


THE DEVELOPING COUNTRIES MISSED OUT ON THE OIL SHOCKS OF THE 1970s

Real Domestic Oil Prices in Selected Developing Countries 1970 = 100

0

100

200

300

400

500

600

1970

19

72

1974

19

76

1978

19

80

1982

19

84

1986

19

88

1990

1970

= 1

00

KOREAARGENTINABRAZILINDIAINDONESIAMALAYSIAMEXICOPAKISTANPHILIPPINESTAIWANTHAILANVENEZUELA

Source: Computed from Lawrence Berkeley Laboratories data 1989

COMMERCIALLY ENERGY INTENSITY

COMMERCIAL ENERGY INTENSITIES

00.20.40.60.8

11.21.41.6

JAPA

N

GER

MA

NY

FRA

NCE

UK

USA

BRA

ZIL

KORE

A

ARG

ENTI

NA

MA

LAYS

IA

THA

ILA

ND

PHIL

IPPI

NES

MEX

ICO

INDO

NESI

A

PAKI

STA

N

INDI

A

KENY

A

HIG

H IN

CO

ME

MID

DLE

INC

OM

E

LOW

INC

OM

E

KG

OIL

EQ

UIV

ELEN

T N

EED

ED T

O

PRO

DU

CE

$1 G

DP

Source:World Bank

BUT IN THE NEW WORLD: Doubts over demand destruction?

• Range of uncertainty over 2007 – Average 1.4 mbd Range 1.0 to 1.9

• Little sign of global economic slow-down although there are concerns

• In the OECD all the easy fuel switching and improved oil efficiency has been done

• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s. There is scope for using less oil BUT it will take time


-500

0

500

1000

1500

2000

2500

3000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

thou

sand

bar

rels

per

day


BUT IN THE NEW WORLD: Will Non-OPEC supply respond?

Non-OPEC Production growth 1997-2007

-1000

-500

0

500

1000

1500

2000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

thou

sand

bar

rels

per

day

NON-OPEC FSU AVERAGE OF 8 FORECASTS

There are concerns about Russia-Political uncertainty-New fiscal system

The estimates for 2006 and 2007 are probably over stated-Remember at the start of 2005 the average of 8 forecasts estimated Non-OPEC for 2005 at 1.4 Mb/d. The outcome was only 0.04 Mb/d. Start of 2006 estimated 1.2 Mb/d now 0.9 Mb/d-Although the average for 2007 is 1.6 mbd the range is 1.0 to 1.9 mbd

BUT IN THE NEW WORLD: Non-OPEC supply is not responding because of

insufficient investment

• International oil companies– Returning money to the shareholders

• In 2005 the top six IOCs invested $54 billion BUT they bought back $40 billion of shares and declare a dividend of $31 billion.

– Managerially constrained because of “downsizing”.• Since 1981, over 70% of the workforce of the top 25 oil companies

have been laid off

– Service industry insufficient capacity because of monopsony and Ecommerce.

• In 2002-3, the lead time to hire a jack-up rig averaged around seven months. Now the delay is over two years.

BUT IN THE NEW WORLD:Supply is not responding because of insufficient investment

• International oil companies

• OPEC national oil companies have plans but face serious constraints

OPEC Plans –But there are constraints

Country Gross Increment 2005-6 (000 b/d)• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200• Venezuela 175• OPEC NGL 600• TOTAL 3170• Source IEA November 2005


• Service industry constraints

• Capital access constraints because NOCs are seen as high cost and inefficient “rent seekers”

• Concern over security of demand after George W Bush’s State of the Union Address

• Growing concern over the threat of an attack of “resource curse”

• Growing resource nationalism



• Iran and President Ahmadi-Nejad = chaos and anti-IOC and buy-backs and fear of sanctions and …..

• Venezuela – Chavez moving into election mode – PDVSA forced into social spending + fiscal squeeze

• Nigeria – Political unrest growing, tougher fiscal regime unrealistic local content clauses

• Kuwait – Project Kuwait remains a political football

• Libya- unattractive fiscal terms and delayed reforms

• Algeria – New hydrocarbon law


BUT IN THE NEW WORLD:Supply is not responding because of insufficient investment

• International oil companies

• OPEC national oil companies have plans but face serious constraints

• What about the national oil companies of the Asian oil importers?

Conclusions for the medium term

• Investment upstream and downstream is unlikely to be sufficient even with higher prices thus supply constraints will remain…

• “Higher” prices are here to stay for a long time. The issue is how high is “high” and how long is “long”? In the 1990’s prices averaged $19 per barrel …

The Peak Oil ArgumentHubbert Curve

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

0.550

0.600

Prod

uctio

n (b

illion

t)

time

quantity

Hubbert Curve

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

0.550

0.600

Prod

uctio

n (b

illion

t)

time

quantity

Hartshorne, 1993

What is it?

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

0.550

0.600

1700

1725

1750

1775

1800

1825

1850

1875

1900

1925

1950

1975

2000

2025

2050

2075

2100

2125

2150

2175

2200

2225

2250

2275

2300

2325

Prod

uctio

n (b

illion

t)

What are the long term prospects?

• Eventually the market will respond– Demand in the developing countries will

fall. There is still a lot of fuel oil used under the boiler in those countries (4.9 Mb/d in 2004

– Supply will increase and there will be an increase in non-conventional liquids

• But remember that the 1986 price collapse was 13 years after 1973. This time ……..????

THANK YOU FOR YOUR ATTENTION

Professor Paul StevensCentre for Energy, Petroleum and Mineral

Law and PolicyUniversity of Dundee

Scotland

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