With the Organization of Petroleum Exporting Countries meeting in Vienna Sept. 15 to do little more than bemoan their inability to affect oil prices and debate the relevance of current quotas and price bands, now is a good time to reflect on paradigms and cycles and plateaus.
The near-term outlook for oil prices seems assured: still on the high side and wildly volatile. In the span of a mere 2 weeks in August, oil prices dropped about $8/bbl. It wasn't that long ago that an oil price drop of that magnitude in that brief a timeframe would have resulted in much gnashing of teeth and rending of garments. Yet the market largely has shrugged off that steep fall and instead continues to fret about more price spikes to come.
In the long term, one need not be a Hubbert-theory devotee to become convinced that, whether or not global oil production peaks within a few years or several decades hence, there is no doubt that the Middle East OPEC countries will command an ever-growing share of the world oil market. At some point OPEC too will run into a wall, leaving price-induced demand destruction, technological innovation, and fuel substitution to keep oil prices out of stratospheric levels.
New paradigm already here?
But what about the intervening years, say, namely the rest of the decade? Will markets see generally higher oil prices or generally lower oil prices? To which we can only respond: Yes. Watch the demand cycles.
Oil demand growth always has come in cycles, and its surprising surge this year has had as much to do with oil prices being north of $40/bbl today as have supply threats. That's a key factor cited by proponents of the view that a new supply-demand paradigm is already here and likely to stick around for the decade.
"Like the natural gas markets in the mid-1990s, the oil market finally appears to have worked off its supply 'bubble' to the point where oil prices are likely to see higher highs and higher lows over the next decade," said J. Marshall Adkins of St. Petersburg, Fla.-based Raymond James & Associates Inc.
Pegging US benchmark crude West Texas Intermediate at $40/bbl in 2005, he suggests that a major supply disruption could push prices past $50/bbl and sees OPEC defending $35/bbl in the years thereafter. Adkins also contends that while sustained oil prices in excess of $40/bbl may rein the pace of economic growth over 3-5 years, it would not mean a global economic shutdown.
Another cycle?
A considerably less sanguine view seems to emanate from the International Energy Agency, which in its September monthly market report suggests that in fact the oil market today is well-supplied with crude.
Crude and gasoline stocks in the key markets are at comfortable levels; non-OPEC oil production will rise by 1.4 million b/d by yearend and 1.7 million b/d in 2005, with more capacity coming online from OPEC at the same time; and "geopolitical risks remain real, but they are no greater than they were in the past," said IEA.
"Suggestions of sustained $40-plus prices assume that supply and demand do not respond to price, that technology has run its course, that governments are helpless in pursuing energy policies, that recessions are a thing of the past, and that Chinese oil demand will grow unchecked forever," the agency said. "Perhaps, but we have our doubts. What is clear for now is that supply is running ahead of demand and stocks are building."
New plateau
Or will the shape of the oil market to 2010 be a plateau? Fereidun Fesharaki, principal of Honolulu-based FACTS Inc., contends that indeed market fundamentals have changed, reaching a new plateau. In this view, cycles will come and go and volatility will continue but from a higher price base.
"We have essentially graduated from $15-25/bbl (Dubai/Arab Light crude) to $25-35/bbl in the short to mid term," he said in a September report.
Fesharaki sees no oil shortage ahead or a collapse in the world economy, as higher prices trim demand and encourage alternatives.
Now if we could only do something about the booming demand for crystal balls and tea leaves.
(Online Sept. 13, 2004; author's e-mail: [email protected])
