Last of a two-part series.
Last week's column dealt with forces arrayed for a possible oil price collapse in the coming year, particularly with regard to the standoff between the Organization of Petroleum Exporting Countries and non-OPEC oil exporting nations led by Russia.
This week's column looks at the longer-term prospect for the continuance of both downward and upward oil price pressure.
Other OPEC competition
OPEC has cause for concern from other oil supply sources eating into its market share: burgeoning output growth from the Caspian region and deepwater fields, a boom in volumes of Venezuelan and Canadian syncrude from oil sands and extra-heavy crude, and new liquids output associated with increased gas production and the emerging gas-to-liquids technology (Venezuelan syncrude from extra-heavy crude currently does not count toward its quota).
And then there is the boom in technology advances and new structural efficiencies that have underlain a new foundation for the economics of many hitherto uneconomic prospects.
"The rise in upstream costs since 1996 is already being reversed [because of technological progress]," said Cambridge Energy Research Associates Pres. Joseph Stanislaw. "Upstream costs in non-OPEC countries are expected to fall by an average of 3%/year to 2010-from almost $9/bbl to little more than $7 [in inflation-adjusted terms.
"Cost reductions will occur fastest in the deep water…at an average of 4%/year."
It soon becomes apparent that only a return to robust oil demand growth will prevent the kind of market share erosion that forces OPEC to instigate another price war.
There is certainly adequate scope for such a demand projection, especially as the developing nations' economies continue to grow in the next 2 decades.
The International Energy Agency projects oil demand will climb by 41-65% by 2020 from 1997 levels, depending on the oil price scenario. But those same oil price scenarios incorporate a projection of OPEC market share that could range from 43% to 60%.
Past evidence suggests OPEC will not cede that market share lightly. With the clout inherent in possessing the lion's share of the world's oil reserves and nearly all of its spare productive capacity, the inescapable conclusion is a moderate long-term oil price forecast at best.
Geopolitical turmoil
The near term provides a much more volatile outlook, and projections of price collapse must share the spotlight with the possibility of a price spike in 2002.
The focus of concern here is the always unpredictable regime of Iraqi President Saddam Hussein. The growing ties between the US and Russia in the wake of the Sept. 11 events came to a head with an agreement last month to allow unchallenged a rollover of the latest United Nations-brokered oil-for-aid sales program in Iraq.
Whatever political expedience that accord served in light of the Afghanistan campaign and restive Islamic populations, it also set the stage 6 months from now for a bid by the US to renew its demand that Baghdad allow UN military inspectors back into the country. If Russia's overtures to the US and Europe are genuine, then a confrontation with Iraq seems inevitable.
The loss of 2 million b/d or so of Iraqi oil exports would jump oil prices sharply at first, but there remains more than enough spare capacity in Saudi Arabia alone to take up the slack. The bigger concern remains a spillover effect that could affect other Persian Gulf exporters, notably a terrorist act or some widespread civil unrest and related political or military response.
The region will remain a cauldron of trouble irrespective of what happens with the Afghanistan campaign, Iraq, or the Israeli-Palestinian conflict this year. And there are some who believe that there is a shrinking capability even among the main Persian Gulf exporters to meet future oil demand. This view holds that these two concurrent trends will eventually converge in an explosion of sustained high oil prices.
If there is one certainty about the outlook for oil markets, it is a reaffirmation of the view that geopolitical considerations, for the moment, are still as much a short-term driver of oil supply, demand, and prices as are economic considerations.
The post-Sept. 11 "new world order" may be changing all that, and someday oil markets may be ruled by economic sanity to everyone's benefit. But between here and there lies a minefield of volatility.