7.41 AM Tuesday, 19 March 2024
  • City Fajr Shuruq Duhr Asr Magrib Isha
  • Dubai 05:07 06:20 12:29 15:54 18:33 19:47
19 March 2024

Fresh crisis may hit oil prices

Published

Oil prices have remained firm and stable because of the relatively strong demand in emerging economies and commitment by Gulf producers to balance the market but prices could tumble if the current western financial crisis spreads worldwide, a well known Arab energy analyst has said.

Oil prices could have plunged under the pressure of slower demand in the European Union and the US but the slowdown is offset by robust growth in India, China, South Korea and Brazil, said Walid Khadduri, a former a former adviser at the Organization of Arab Petroleum Exporting Countries (OAPEC).

Moreover, the disruption in oil supplies from Libya gave rise to concerns that the so-called ‘Arab Spring’ might expand to other countries and thereby cause more disruptions in crude oil supplies, he said in an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research.Additionally, natural disasters also caused rise in oil prices (tsunami and earthquakes in Japan and a series of tropical storms and hurricanes in the Gulf of Mexico which intermittently closed down oil production from the US and Mexican offshore oilfields), Khadduri added.He noted that oil prices remained stable in summer, but witnessed a sharp decline in early August.

Statistics supplied by the OPEC Secretariat show that OPEC basket crude oil prices in July stood at $111.62 a barrel, in August $106.32 a barrel and in the first week of September at $110.62 a barrel.

These price levels remained close to the average price of OPEC basket crude prices in the second quarter of this year, which stood at $112.18 a barrel. However, they were still much higher than the average OPEC basket crude prices in 2010, which stood at $77.45 a barrel, said Khadduri, ex-editor of the Nicosia-based Middle East Economic Survey (MEES).“The second issue pertains to the stability of crude oil prices amid such global economic storms. It must be pointed out here that the Arab Gulf States (Saudi Arabia, UAE and Kuwait) have remained committed to ensuring the balance between supply and demand for crude oil, and attempting to maintain moderate and stable prices levels as possible. OPEC has unanimously adopted such a policy over the past decade,” the Iraqi expert said.

“However, new significant challenges have emerged, notably the opposition of Iran and Venezuela to this policy, and the available information indicates that this opposition will continue in the foreseeable future.”He said that national interests of countries with huge oil reserves – equal or more than 100 billion barrels — lie in prolonging the oil era as much as possible, in order to maximize their benefits from these huge reserves. The prolongation of the oil era is done by maintaining stability in oil markets, as well as a reasonable and stable selling price, especially during this time of competition with other energy alternatives.

“However, it is clear that Tehran has started to oppose this approach for purely political reasons, in the backdrop of its dispute with the GCC,” he said.Another key factor in the equation of market stability cited by Khaffuri is the resistance of emerging economies from economic turmoil in Western industrialized countries.

He said this means there is a growing demand for oil in emerging economies, despite the downturn in Western industrialized countries. “Still the question remains: for how long will this disconnect continue, as it is basically an abnormal situation? The major problem lies in the attempt of Western countries to maintain their higher economic and social standards and compete with emerging economies, at much higher production costs,” he said.

“On the other hand, emerging Asian countries face considerable problems that may adversely affect their respective economies in the medium term, such as the high value of their currencies relative to those of their economic rivals, which weighs on the volume of their exports as the main driver of their economies; widespread corruption in China and in India (which has witnessed a massive popular movement against corruption); high inflation rates, in addition to increasing social problems resulting from mass displacement of population from the countryside to urban centers in search for jobs,” he added.

“In light of these facts, what could be expected from oil markets? There are some important indicators that cannot be overlooked, such as the EU statement that economic growth in the eurozone “will almost halt in the second half of 2011.”

Khadduri also noted that the International Energy Agency and OPEC both predict an economic contraction and a decline in demand for oil in the second half of 2011 and in 2012. He said this forecast is not only for the industrialized countries of the West but also in emerging counties, given the difficulties and challenges facing Chinese and Indian economies.“Of course, the accuracy of these predictions remains to be seen, but it is difficult to expect that the global economic crises, which have persisted since 2008, will not have serious impact on the rest of the world,” he said.

“These crises are likely to affect countries, such as emerging economies, which export low-cost manufactured products and services to the West; or oil-producing countries, which may suffer a decline in demand for oil to disturbingly low levels that could affect prices. All these are possibilities and speculations about what the world (in industrialized, emerging and oil-producing countries) may face in the coming months, and they are difficult to ignore.”