Producers, consumers urged to adopt $60-$80 fair price for oil

Hydrocarbon producers and consumers need to bridge a long-standing gap in their views about crude prices and adopt a common band of $60-$80 a barrel as a fair price of oil, an official Arab oil group proposed yesterday.

Evidence suggests that consumers are differently affected by higher oil prices and have different coping potentials, and this may explain why as a group, they have been "intentionally" vague about their price preferences, said the Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries.

In contrast, producers have been more forthcoming in revealing their preferences probably due to their relative economic similarities and disproportionate vulnerability to international oil prices, the Dammam-based Apicorp said in its monthly economic commentary sent to Emirates Business.

"Common interests in promoting global energy security and stability should bridge the dividing lines on price issues between oil producers and consumers. The erratic market behaviour of the past few years has presented policymakers from both sides with a compelling opportunity to take action and put in place appropriate measures to limit price swings and volatility," it said.

"The first step in developing such measures is to take a shared view on oil price preferences. A non-market perspective confirms that, under prevailing conditions, such preferences lie in a range of $60-$80 a barrel, at the confluence of the anticipated economic cost and the fiscal value of a barrel of oil."

The study said the next step would be the adoption of a price band mechanism capable of keeping market prices within the above range. "The suggestion that a price band could anchor market expectations has more chance to appeal to oil producers and consumers in the current market environment than any time before," it said.

"However, even as the idea creates a win-win opportunity for both producers and consumer, its implementation raises difficult political and policy challenges, which are certain to stimulate further debate."

The study, authored by Apicorp's economic chief Ali Aissaoui, attributed the row between producers and consumers over the price level to what it described as macro-economic anomalies related to the structures of trade, GDP and budget receipts. It noted that in the International Energy Agency (IEA) countries, energy imports represented about 21 per cent of total imports in 2008, and energy trade accounted for some seven per cent of aggregate GDP.

By stark contrast, in Opec countries, petroleum exports represented about 85 per cent of total exports and petroleum trade amounted to some 44 per cent of aggregate GDP. Similarly, despite the fact that the IEA countries get much more revenues from taxing final petroleum consumption than Opec countries get from taxing primary production, the share of these respective revenues in total budget resources was seven per cent for the IEA and 72 per cent for Opec.

According to Apicorp, the steep fall of oil prices from nearly $150 in the summer of 2008 to under $35 the following winter prompted Saudi Arabia to announce $75 as its preferred price – dubbed fair price – a price shared by nearly all other Opec members. It said this preference was also echoed by a panel of energy industry leaders, gathered at the World Economic Forum in Davos early this year to debate the repercussions of the credit crisis and economic recession.

It said the participants highlighted the impact on the industry of reduced demand, lower cash flows and insufficient funding and called for a price in a range of $60-$80 a barrel to sustain investment in the sector.

"Our evaluation of a price range derives from a forward-looking economic perspective, which we have been reiterating since the third Opec Summit in Riyadh in November 2007. Such a range can be set at the confluence of the investment cost to develop frontier petroleum projects and the fiscal value of recoverable petroleum reserves," the study said. It said the investment cost of producing a barrel of crude oil can be determined by assessing the economic viability of different exploration and development projects under relevant geological, technological, and market risk conditions.

The most current costs are provided by the IEA, which has updated its estimates to take into account advances in technology and the price inflation of key input industrial factors, Apicorp added.

Citing IEA findings, it said nearly 1.1 trillion barrels of oil have been produced at a cost below $30 a barrel in 2008. The cost of exploiting the remaining conventional oil is below $30 a barrel within Mena and up to $40 in other areas. The cost for oil sands falls between $30 and $70 a barrel and that of oil from new enhanced oil recovery projects between $30 and $80. Oil shales are the most expensive to exploit with costs ranging from $50 to $110 a barrel.

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