Energy commodities regulators worldwide will need to move carefully and cooperatively if they expect to make global oil markets more transparent, US Commodity Futures Trading Commission member Scott D. O'Malia said in Tokyo on Feb. 26.
"We have to acknowledge that we've witnessed a paradigm shift in the global oil market over the past decade," he said in remarks to the International Energy Agency and Institute of Energy Economics Japan's Forum on Global Oil Market Challenges. "The paradigm has shifted in two significant ways…. First, oil is now a financial asset and its price movements are correlated to economic growth. Second, the growth in oil demand is being led by developing nations."
O'Malia noted that Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, said that developing nations accounted for 85% of global oil demand over the past decade, and that the US Energy Information Administration predicts that oil demand will grow by 44% between now and 2030.
"Future demand can readily be anticipated since China is now the largest automobile market in the world," O'Malia continued. "The oil demand shift, however, has resulted in less transparency in oil usage and reserve capacity in these nations. This is a very troubling trend."
Spare market capacity is an important factor, he said. "The price of oil peaked in 2008 at $147/bbl, in part, because the global demand had virtually eliminated any spare capacity in the global oil markets. In fact, during the price spike, there was less than 2 million b/d of spare capacity," O'Malia said.
The global economic recession has reduced oil demand and created some temporary spare capacity, the CFTC official said. He forecasts that this spare capacity will be depleted by 2015 and the world's oil markets could see a return to conditions similar to 2008. "It's imperative that oil markets have accurate and timely data regarding tightening in market conditions if we hope to avoid the future price spikes that will undermine our economic growth," he said.
Dramatically different markets make transparency imperative, according to O'Malia. He said that since its formation in the 1970s, IEA has coordinated energy policy among its member countries and published energy utilization, refining, and reserve capacity for the world's largest markets. "However, with the growth in oil demand anchored in developing nations, more must be done to make these developing markets as transparent and open as IEA member countries," he said.
Publishing data regarding oil in-transit will reduce uncertainty about what is being stored at sea or withheld from the market, he said. "In addition, we must call into question the practices of certain oil traders that buy oil and put that oil into storage, if such practices are designed to extract money from consumers and producers," said O'Malia.
He said changing oil demand patterns mean that IEA member countries must be committed to expanding the organization's membership or creating another data collection entity which has the confidence of developing nations. "As a consensus on this entity develops, G20 member nations, as set force in their Pittsburgh communique, must lead by example in collecting and reporting all oil market data to make sure that the markets are completely transparent," he suggested.
"The G20 nations now represent the largest oil users and the top producing nations," O'Malia said. "The IEA can facilitate the data collection in order to prepare this data for the G20 meeting to be held in Toronto in June."