Oil prices could be stifled in the long term by massive expansions in Iraq’s hydrocarbon output capacity and the latest call by International Energy Agency (IEA) to cut crude consumption, an energy centre said yesterday.

The London-based Centre for Global Energy Studies (CGES), run by former
Saudi oil minister Ahmed Zaki Al Yamani, described the IEA’s call for
energy investments of more than $10 trillion (Dh36.7trn) as
“frightening”.

In its weekly report sent to Emirates Business, CGES said such
developments would create confusion in the oil market despite signs of
global recovery.

It noted that with the passage of every week, evidence seems to be building that the world economy is now in the recovery room.

It cited a growth of more than three per cent in the US gross domestic
product in the third quarter of 2009 over the previous quarter and a 16
per cent surge in the Baltic Dry Index also suggests that world trade
is picking itself slowly off the floor.

“However, despite such welcome tidings, the oil industry faces more
confusion and uncertainty with the appearance in the news last week of
two oil-related items having very different longer-term implications,”
said the report. “On the one hand, there was the publication of the
IEA’s 2009 World Economic Outlook, which frightened everyone with its
call for more than $10trn of additional investments in energy
infrastructure and energy-related capital stock to avert catastrophic
climate change… on the other hand, there was news that Iraq had
agreed with a consortium led by ENI to expand output at its Zubair
oilfield.”

According to the report, new capacity from this giant oilfield, when
added to additional production from other massive Iraqi fields, means
that in seven to 10 years Iraq will be able to produce at least eight
million barrels per day, placing it among the world’s largest oil
producers, second only to Saudi Arabia in Opec.

“We have in these two items the kernel of a severe problem that will
surely increase by many notches the existing stresses and strains in
the oil business. The IEA argues that business will generate oil demand
growth of one per cent annually to 2030 amid an overall rise in
hydrocarbons consumption that will lead to seriously high levels of CO2
and occasion catastrophic climate change. To prevent this will require
the emasculation of fossil fuel use, hence their advocacy of the 450
(parts per million of CO2) scenario, according to which oil use will
need to be curtailed by almost 17 mbpd over the next 20 years,” said
the report.

“Something will have to give when a required massive cut in global oil
consumption is juxtaposed with huge planned increases in Iraqi oil
capacity, and boosts elsewhere too.

“Very high prices could slash oil use, but they are likely to be
obtained by tax increases at the consumer end, leaving producers in the
Middle East with a lot of low-cost capacity on their hands. Under these
conditions it is difficult to see how the price of crude oil could stay
on a rising trajectory in the years ahead, as the futures market seems
to think it will.”

The report noted that after a promising start this year, when US
refining margins exceeded last year’s by a healthy amount, they have
performed badly in comparison with 2008 and very poorly compared with
2007.

“In 2007 crude oil prices were rising strongly… however, product
prices were outpacing crude because of strong growth in the US economy,
which allowed refiners to more than claw back higher input costs.

“Last year, margins were reasonable in the first half but weaker in the
second, apart from a brief hurricane-induced interlude of extremely
high spreads, because the US was hit hard by the financial crisis from
August onwards.

“Margins since mid-March 2009 have been consistently low, especially
after mid-September, largely due to surges in crude oil prices that
refiners have found difficult to pass on to financially strapped
customers in a recession,” said the report.

Source: Emirates Business

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