Making price forecasts is an activity fraught with peril in the international market for crude oil. But it says something about the state of things that anyone mentioning $300 per barrel is no longer asked to have his head examined. It?s a painful figure to contemplate, with the world still to come to terms with the reality of crude oil prices testing $100 per barrel, but a session at the forthcoming Davos Energy Summit will see the likes of Chevron and ExxonMobil deliberate on ?Energy Security?Tomorrow $300??
It?s an important question. High and volatile energy prices pose serious problems for the sustained growth and stability of the global economy. If oil prices keep going up, country after country will find its economy slowing down. The Davos summit, on January 23-25, is a prestigious event under the aegis of the World Economic Forum that will have the who?s who of the global energy business gathering to discuss the future. While the $300 figure in the theme may be an exaggerative ploy to shake people up, the discussions on energy security would be relevant to all. Moreover, in the oil business, the unthinkable is known to happen. Remember when oil was scraping $10 per barrel in the late 1990s?
What explains these price swings? Crude oil has no close substitute, and a major chunk of the supply source operates as an output-controlling cartel in the form of Opec, so its market behaviour as a commodity tends to be very volatile, with small shortages causing disproportionate changes in price.
Of course, most of Opec?s members are located in the Middle East, which is also politically volatile, so this adds to the market jitters. Price spikes are typically in response to sudden supply squeezes??oil shocks?. The Arab oil embargo of 1973, for example, was one. The Iranian crisis of 1979 was another, which was followed by the first gulf war. Iraq?s invasion of Kuwait and the second gulf war was yet another shock.
Under normal circumstances, analysts pay most attention to the role of ?swing producer? Saudi Arabia, which underpins Opec policy with its large-scale, low-cost oil operations. Until 2004, Opec maintained its $22-$28 price band, but abandoned it after that because global demand was rising fast, and its spare capacity was strained. Since then, there has been no looking back for oil prices.
Latest official data reveals that the Indian basket of crude oil touched an all-time high of $88.28 a barrel on November 5. The average price during April-October 2007 has been $70.87 a barrel, as against $62.46 a barrel during the corresponding period of last year.
And conditions remain tight. Global inventories, which act as buffers, are low and falling. According the International Energy Agency (IEA), the forward stock cover fell below the five-year average to 53.5 days at the end of August 2007. Meanwhile, global oil demand is projected to grow by 1.2% in 2007 and 2.1% in 2008. With Asia?s large economies on a roll, demand is expected to rise by 2.1 million barrels per day in 2008, compared with just 1.2 barrel per day in 2007.
Some analysts suggest that Opec?s diminishing spare capacity should loosen its hold over prices (it accounts for 40% of supplies but rules by causing most market ripples), but with demand so strong, all that has declined is its ability to lower prices. In fact, a tighter market simply spells more volatility. Any disruption now spells much more havoc. The geopolitical situation in Iran, and even Nigeria, is therefore under close watch.
But, given a possible US recession, will demand for oil start softening? Some analysts think so, while others are betting that Asian growth and consequent oil demand will make up for any slack in the US and EU. There is no sign of panic in India just yet. As a senior petroleum ministry expert has explained, ?When adjusted for inflation, oil prices now are still considered lower than prices that prevailed during the early 1980s.? Keeping a close ear to the Davos discussion, however, would still be worthwhile.
