Prices to surge despite increase in crude
Oil producers are expected to add nearly 11.7 million barrels per day to their existing capacity by 2010, but only a third of the increase will come from Opec, according to the United Nations. Despite the addition, the world will continue to suffer tight spare capacity, one of the main reasons for the current oil price surge, said the study by the UN Conference on Trade and Development (UNCTAD).
In its 2007 global investment report, UNCTAD said the sharp rise in oil prices has surprised observers and blamed what it called a slow response in supplies, strong demand from China and other countries, low investments in capacity expansion and other factors.
“The price boom took most observers by surprise. It was driven by very strong demand coupled with supply constraints. Unlike earlier boom periods, growth in demand this time came mainly from developing countries. China, in particular, is currently experiencing a resource-intensive growth phase; in addition, the country ’s economy has been growing more than three times that of the world economy over the past decade,” the study said.
“It has therefore become a major engine of world mineral demand growth – in 2005, it accounted for 29 per cent, 66 per cent and 25 per cent, respectively, of the growth of oil, copper and nickel demand, and its share in total world demand for oil, copper and nickel was 8.5 per cent, 22 per cent and 16 per cent respectively.
“The price rises were also due to slow supply responses. The extended period of low mineral prices had led to reduced investment in human resources, production and refining capacity, resulting in a significant decline in spare supply capacity. Many high-cost production installations were closed in the process.
“Thus, when demand suddenly surged, there was little idle capacity left to satisfy the growing consumption. Moreover, shortages and rising costs of inputs caused further delays in the expansion of supply capacity. Low levels of stocks, geopolitical instability and unpredictable events, such as strikes and hurricanes, put additional upward pressure on prices.”
The report said the price rise has triggered a worldwide investment surge, fed in part by growing profits. Despite cost increases of many inputs, the profitability of mineral producers has risen fast. Citing ExxonMobil as an example, the study said the company’s earnings for 2006 were the highest ever reported by a United States corporation. It noted many companies are taking advantage of the high commodity prices to expand their production facilities.
According to the study, oil and gas drilling operations have doubled since 2002, and the number of active rigs has been the highest in 20 years.
“This intense activity has helped push up costs. Drilling day rates have risen by 10 to 15 per cent a year since 2003. Companies are scouring the global labour markets for oil and mining engineers, as the dearth of specialised manpower is creating a bottleneck in the execution of investment projects. Supply constraints notwithstanding, the volume of new oil production capacity is expected to grow.”
According to one study, for the five-year period 2006 2010, global oil production capacity is projected to increase by 11.7 million barrels per day, of which no more than 3.8 million barrels per day will be additional oil supplied by the Opec countries.
Global demand in the same period is expected to rise by 8.1 million barrels per day, thus relaxing the capacity constraint by 3.6 million barrels per day.
However, other observers have warned that supply constraints may result in a further tightening of oil market fundamentals.?
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