Oil prices may hit new peak

Oil prices could climb to their highest ever peak in the absence of sufficient investments that will guarantee enough spare production capacity to meet any possible surge in global demand, according to an official Arab study.

Oil producers could be discouraged to invest enough in capacity expansion projects by low oil prices, high project costs, global credit tightness and uncertainty in future outlook and the size of required capital, said the study by the 10-nation Organization of Arab Petroleum Exporting Countries (OAPEC).

The study, published in the quarterly Arab oil cooperation magazine, said investments needed for such projects have sharply risen since 2005 because of higher construction costs, adding they are still high despite a post-crisis decline.

It said such an increase has been complicated by what it described as foggy outlooks regarding oil demand and the required capital. It said investments scenarios ranged between $100 billion in 2013 and $250 billion in 2020.

The Kuwaiti-based OAPEC, a key Arab League establishment, said the surge in costs have also combined with the global credit tightness to force several hydrocarbon producers to shelve or put on hold some expansion projects.

Citing a recent study by the 12-nation Organization of Petroleum Exporting Countries (OPEC), it said low project implementation, coupled with a possible rise in global demand due to an expected economic recovery, could depress OPEC’s spare output capacity to only around two million barrels per day in 2013 from more than six million bpd in 2009. The decline will push down the share of the 2013 idle capacity to only about two per cent of the world crude demand.

“Investment remains the main player in ensuring oil supply but investments require removal of all obstacles including those foggy scenarios regarding demand and supply, the credit squeeze and other factors…this in turn requires stronger cooperation between oil producers and consumers,” OAPEC said.

“In such developments, oil prices could move within two different scenarios—the first one involves low oil prices and consequently low investment…in this case, when global oil demand rebounds, the spare capacity of producers will gradually erode…by the middle of the next decade, oil prices could climb to new peaks and we could see a new price spike that is more severe than the previous one.”

The report said the second scenario includes an improvement in oil prices, which will encourage investment in capacity expansion and cooperation between producers and consumers to reduce uncertainty in demand outlook.

“This will ensure the output capacity will match growth in demand and this in turn will contribute to stabilizing prices at reasonable levels.”

The study said oil consuming nations should also reciprocate by reassuring producers about future demand to encourage them to invest in expansions.

“Failing to do so, it will be unfair for the consuming countries to ask producers to pump massive funds into capacity expansions that might not be needed.”

According to OAPEC, the surge in oil prices during the second boom in the few years until 2008 benefited key consuming nations more than producers given the sharp increase in the taxes imposed on energy imports in the consuming states.

“For example, Germany’s revenue from taxes on oil imports surpassed the hydrocarbon export income of the UAE during 2000-2008,” it said.

Its figures showed that in 2008, when oil prices climbed to their highest average of nearly $95 a barrel, the UAE’s crude export income peaked at just above $80 billion while Germany netted over $100 billion from oil taxes.

France’s oil tax earnings also exceeded Kuwait’s crude export revenue of around $70 billion as they were estimated at nearly $74 billion.

“As for Saudi Arabia, its oil exports exceeded the combined crude imports of France, Germany, Britain and Italy by nearly 303,000 bpd during 2005-2008…but their income from oil taxes were much higher than that of Saudi Arabia…in 2008 alone, Saudi Arabia’s oil income stood at around $20 billion while that of those four countries exceeded $300 billion,” the study said.

The report showed that during 2002-2006, OAPEC members netted around $1,205 billion from crude exports while taxes in seven major industrial nations (G7) fetched them a staggering $2,310 billion.

International oil companies (IOCs) emerged as the top gainers as their combined revenues reached $5,503 billion during that period, it said.

The figures showed the sharp rise in oil prices in 2008 boosted the combined Arab revenues to a record $618 billion.

“The figures prove that the revenues of the industrial countries from oil taxes and those of the IOCs far exceed the income of Arab oil producers…during 2002-2006, the IOCs netted nearly five times the income of OAPEC members while the revenues of industrial nations from energy taxes were almost double OAPEC’s income…this shows they benefit from high oil prices,” it said.

“On a yearly basis, the annual average income of OAPEC member countries was around $241 billion during that period while it was as high as $460 billion in the industrial countries and $1,100 billion in IOCs.”

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