Low oil prices 'may damage consumer interests'

Low oil prices benefit consumers in the long term but they could be damaging in the medium term as lower hydrocarbon investment could lead to supply shortage and a new price spike, two veteran experts said.

A collapse of nearly $100 (Dh367) a barrel in crude prices over the past few months has already prompted moves by producers to revise down their investment plans in the hydrocarbon sector, they said.

The view was outlined in an article written jointly by Noé van Hulst, Secretary-General of the Riyadh-based International Energy Forum (IEF), and John Sfakianakis, Chief Economist at Saudi British Bank (Sabb).

According to the article, which was published by International Energy Forum last week, 2008 recorded what they described as the most extreme volatility of oil prices. The experts said they believed there was a consensus that this extreme volatility was not only due to supply and demand factors in the physical oil market, but exacerbated by speculation in the futures market. Extreme price volatility negatively impacts the economic interests of the consumers and producers alike, they said.

"As speculation on the upside remained untamed, at present shorting oil is exaggerating oil prices on the way down. This results in huge uncertainty about oil prices leading toward underinvestment in oil and even in renewables," they said in the article, which was sent to Emirates Business.

"But aren't current oil prices good news for consumers? Yes, in the short run they are. However, in the medium term there is a very serious risk that we are setting ourselves up for the next supply crunch and another round of price hikes once the world economy recovers. The reason is that the current level of oil prices is already causing the delay and postponement of many investment projects in the hydrocarbon industry."

They noted that in the upstream oil sector the largest oil exporter Saudi Arabia is on track of fulfilling its commitment to expand capacity to 12.5 million barrels per day (bpd) at the end of 2009, which the "world has to duly acknowledge". This may result in an unprecedented high level of spare capacity later this year of 4.5 million bpd, they said, referring to the increase in the kingdom's capacity and a decline in its actual crude output this year.

"As comforting as this buffer may seem, current oil prices are severely worsening the business case for difficult crude oil projects in areas where extraction costs are high and slow in coming down (for example, oil sands in Canada and ultra-deep sea in Brazil and Angola)," they said in the article.

"Why is low investment a problem with oil demand declining in 2009? Firstly, because we need the majority of investment to compensate for the substantial decline of oil production from existing fields. Secondly, because once the world economy recovers, demand will rapidly pick up and will start growing significantly again, in particular driven by economic growth in Asia."

The experts urged oil producers to revise their plans to shelve energy projects, saying they should get priority at the expense of other ventures. "As the lack of financing is becoming a justification for part of the lack of investment there is a need to de-link energy investments from the list of troublesome sectors and enable them so as to receive the necessary bank funding," they said.

"Limiting investment in energy is myopic and could turn out to be detrimental. Realistic energy scenarios show that the world will need more oil for many decades, with renewables playing a useful complementary role at most. It is impossible to eliminate volatility. But we can do more to limit volatility through more transparency and better oversight."

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