GLOBAL OIL PRICES

Don't assume the price will retreat rather get ready to face a situation when it touches 100 dollars a barrel

By SHABBIR H. KAZMI
Dec 27, 2004 - Jan 02, 2005

The prices of crude oil may have come down from its 23-year high of last month but if any one thinks that it will go down to 25 or 25 dollars a barrel level he/she is dreaming. There are forecast that it can touch 100 dollars a barrel in next five years. This forecast is based on fact that consumption is on constant rise and demand may outstrip supply. Production cannot be increased at a pace the demand is increasing. On top of this fears of disruption in supplies are growing.

To start with, let us look at the prevailing scenario. There are four key factors which support the belief that the march to 100 dollars a barrel has already started. First, consumption of oil in China is growing at a fabulous rate. Its demand has already surpassed that of Japan and it has emerged as the second largest oil consumer after the US. Second, Yukos the Russian giant contributing nearly 2% to the total global oil production is in serious crisis. The stoppage of oil from Yukos sent oil prices to a 21-year high in July. Third, the volatile situation in Iraq, sitting on world's second largest oil reserves, does not seem to be improving. Fourth, the situation in other major oil producing countries is resulting in frequent interruptions in supply. Fifth, the US consuming one quarter of global production seems to be running out of oil. Since 1970, US oil reserves have fallen from 50 billion barrels to 20 million barrels. Sixth, across the world the oil fields are approaching end of their productive lives.

According to some analysts the current squeeze in the oil market a concern in itself is merely the harbinger of a much greater global crisis. Spare capacity is at the lowest levels in history and further growth in supply seems very difficult. According to James Meyer at the Oil Depletion Analysis Centre, there were 16 large new oil discoveries in 2000, eight in 2001 and three in 2002 and last year there were no. There were predictions that oil production would peak in 2007 but it seems to be peaking much earlier, may be in 2004. One should only expect lower production in the following years.

This spells terrible news for all those countries where the economies are highly dependent on oil. It adds to the insult if they are dependent on imported oil. Oil driven inflation is already eating into disposable income and corporate earnings are shrinking. Just assume what will happen when oil prices touch 100 dollars per barrel. Some of the critics may say that it is too pessimistic an approach. It may take years before prices touch such horrifying levels. They also say that even the recent rise was due to speculation it is also a fact that rising consumption and supply constraints are expected to keep oil prices high in the foreseeable future.

According to Klaus Rehag of International Energy Agency, "Overall speculative activity did not appear to show any unusual trends and wondered if this means that 'commercials' are more actively hedging physical risk. We feel that even if pure speculation is responsible for pushing crude oil prices to the 55 dollars a barrel mark or higher the near term, until the fundamental gap between supply and demand as well as refining sector's structural issues causing high light-heavy crude oil differential is normalized in favor of supply, oil prices are unlikely to retreat back sharply."

According to a report from Investology Research, "Given the uncertain political times we live in, we think the futures market is correctly pricing in the myriad risks to oil supply from existing sources, let alone any unanticipated shocks." The key factors having the potential to influence oil prices are sharp slowdown in the global economy and/or sudden stoppage of strategic petroleum reserve builds by countries. However, no appreciable improvement in the global political and security situation over the next 12 months as well as low probability of recessionary conditions, the downslide risk of oil prices in the short-term seems least probable.

IMPLICATIONS FOR PAKISTAN

Though the government resisted hike in local POL prices for nearly seven months, it has to bow down before harsh realities. It is evident that in order to combat the oil pushed inflation, Pakistan has to exploit alternate energy resources. Pakistan's perennial problem is high oil consumption in power generation. This demands urgent exploitation of its hydel potential. It has been nearly three decades that the country built its last major hydel project. Addition of Ghazi-Brotha and Chasma projects has not really helped in shifting the burden from thermal to hydel. Indus River alone has the potential to generate more than 10,000 megawatts, provided the right projects are built. The national has already wasted three decades in unnecessary debate over Kalabagh Dam. This is not the last word the country needs to build new water storage facilities as well as hydro power projects. Don't waste further time and make the decision at the earliest or be prepared to face the consequences.