Opec estimates oil demand to dip by 1 mb/d as global growth declines

Written by Sanjay Jog | Mumbai | Updated: Mar 15 2009, 04:57am hrs
The Organisation of Petroleum Exporting Countries (Opec) has projected that the global oil demand in 2009 is expected to shrink by 1mb/d as decline in oil demand growth in the Organisation for Economic Cooperation and Development spreads to other regions of the world.

This will result in drop of demand for crude by 1.9 mb/d from a year earlier, to 29 mb/d. Opec in its latest advisory recalled that in 2008 global oil demand declined for the first time since the early 1980s. The organisation observed that the current low price environment certainly represents a significant loss in revenues for both international and national oil companies. It is also leading to underinvestment in exploration and production projectsin both crude and natural gas.

According to Opec, the moderation of prices since last year certainly offers some short-term relief to consumers. However, if the current low price of the crude persists, this short-term relief may not translate into long-term gain. We need to remember that the short, medium, and long timeframes are all interlinked. Oil prices need to be at levels to help sustain economic growth, by supporting long-term energy industry investments across the board. Low oil prices inevitably mean less investment, Opec said.

In a low price environment, projects with high marginal costs and long lead times are going through tough times. With the current constraints on access to credit and debt markets and the uncertainty generated by the global crisis, deep budget cuts in oil industry has become unavoidable.

All of it translates into a decline in drilling activities and staff lay-offs around the world. But it has also led to project delays or cancellations in both the upstream and downstream. In short, underinvestment now may result in market imbalances in the future. And no matter how hard Opec members try to contribute to market stability, it cannot happen without price stability. Extreme prices destroy demand patterns, make investment decisions difficult and undermine sustainable economic growth. This applies to gas markets as well, Opec said.

Opec pointed out a failure by the oil industry to invest will result in a supply crunch by 2013 and beyond. While asking for prices to remain at $40 a barrel, experts also want investments to be made that are not economically viable at these prices. This is widely acknowledged by the industry at large. It is a short-sighted view. Opec remains committed to ensuring a stable, sound and sustainable oil industry, and upholding its investment plans when it makes business sense, Opec added.