Doris Leblond
OGJ correspondent
PARIS, Feb. 4 -- The oil market remains vulnerable to shocks like those of the 1970s, warned Olivier Appert, president of Institut Français du Pétrole (IFP), in his annual assessment delivered at the Panorama symposium Feb. 3 in Paris.
Changes last year, when unexpected demand growth strained production, refining, and transport capacities, didn't shock the market like the Arab oil embargo and Iranian Revolution did in the 1970s.
But a major disruption of oil deliveries from the Middle East would shock the market as much as the earlier disruptions, Appert said.
"Any such major event is today likely to produce the same consequences: an oil barrel [price] around $80-100, albeit even more if one refers to the trebling of prices in 1973 and 1979," he said.
The IFP president noted that China led the demand explosion last year but pointed out that consumption also grew in the US, other countries in Asia, and Europe.
The increased demand required a surge in supply from members of the Organization of Petroleum Exporting Countries and Russia. Future demand growth and the eventual leveling of Russian production will make the world increasingly dependent on OPEC and require increases in production capacity, Appert said.
Surplus production capacity in OPEC, mainly in Saudi Arabia, fell to its lowest level since the 1970s last year, averaging 2 million b/d.
Appert pointed out that price strength for West Texas Intermediate crude results not only from tight supplies but also from the boost new product specifications have given to demand for light, sweet crude. Price differentials between light and heavy crudes have been historically high recently.
High utilization of refining capacity and low stock levels also have contributed to market tension. Appert said the diminishing level of stocks reflects concentration of the oil industry, a drop in operating costs, and the lack of investments in new capacities.
Appert said speculators have contributed to oil-price volatility but cannot be blamed for high prices.
He said crude supplies seem jeopardized by the lack of exploration and production investments, which currently have fallen below their 1980s level, while demand has increased by 30%.
The share of oil revenues invested in exploration and production has fallen to 15%/year from more than 20%/year in most years until 2001. And the investments concentrate on already producing fields or on development of identified fields.
"This phenomenon contains the germs of supply tensions in the years ahead," Appert warned.
Investments
National oil companies, which hold 80% of the world's oil reserves, invest relatively little in exploration. Private companies, which hold 20% of world oil reserves and 30% of world gas reserves, accounted for two thirds of the world's new discoveries during 1999-2003, Appert said.
Five of the largest majors—ExxonMobil Corp., Royal Dutch/Shell Group, BP PLC, Total SA, and ChevronTexco Corp.—hold 5% of world oil reserves and 4% of gas reserves but over the past 5 years discovered 20% of the new fields.
In fact, Appert noted, 2004 showed that the capacity of the oil industry to invest and supply the market satisfactorily is the biggest immediate challenge. The controversy about reserves is a longer-term matter.
Appert noted that since the beginning of the decade, oil prices once considered high have received growing acceptance in producing and consuming countries. Producing countries welcome the revenues, and consuming countries have been able to grow despite the elevated energy cost.
"In 2004, we no doubt entered a new oil market era marked by strong demand, insufficient investments both upstream and downstream, and instability in the Middle East," Appert said. "I am personally convinced that the price of oil will most likely remain, on average, at a high [level] while marked by strong fluctuations."
