IEEJ: December 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (113)

December 5, 2012

Remaining High Crude Oil Prices and Their Background
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices have remained high so far in 2012. In the first 11 months of the year, thebenchmark West Texas Intermediate futures price averaged $94.7/barrel and the Brent futures$111.9/barrel. The averages changed little from the previous year’s levels ($95.1/barrel for the WTI
and $110.9/barrel for the Brent). Crude oil prices have thus remained around $100/barrel for twoyears on end. In my crude oil price outlook for 2012 as released in late December 2011, the futures
price was forecast at $100/barrel (plus or minus $10) for the WTI and $110 (plus or minus $10) for
the Brent, meeting actual levels.
What happened in the international oil market under the continuing high oil prices? First,
oil demand slowed down gradually. According to the November monthly oil market report by theInternational Energy Agency, oil demand in 2012 is estimated at 89.59 million barrels per day, withgrowth from the previous year limited to 670,000 bpd or 0.8%.
A region-by-region breakdown of oil demand in 2012 indicates that demand among themembers of the Organization for Economic Cooperation and Development declines by 500,000 bpd
from the previous year as industrial countries including Japan, the United States and Europeannations suffer an economic slump with demand for transportation fuel falling amid steady
improvements auto fuel efficiency. Non-OECD countries, which have driven global oil demand, posta demand increase of 1.17 million bpd, more than offsetting the decline in OECD countries. But thegrowth for non-OECD countries is slowing down. In China and other Asian emerging countries
where economic growth has decelerated, annual oil demand growth has steadily narrowed from 1.44
million bpd in 2010 to 630,000 bpd in 2011 and 540,000 bpd in 2012, though with oil prices
remaining high.
Given the abovementioned trend, the IEA has substantially revised downward its global oil
demand growth projection in 2012 from the initial level at 1.08 million bpd as released in January.
These points indicate that future global oil demand growth depends on trends in emerging economies
including China and other Asian nations as well as Middle Eastern countries.
Meanwhile, interesting changes have been seen in oil supply. Oil producing countries otherthan the members of the Organization of the Petroleum Exporting Countries (non-OPEC) are1

IEEJ: December 2012 All Right Reserved
projected by the IEA to expand oil output in 2012 by 450,000 bpd from the previous year to 53.22
million bpd. A country-by-country breakdown of non-OPEC oil output indicates that the UnitedStates is expected to expand oil production by a substantial 840,000 bpd to 8.96 million bpd whileother major non-OPEC oil producers such as Mexico, Britain and Norway are projected to continue
reducing their output. Although Canada and Russia have also raised their production, the sharp U.S.
production growth has supported the overall non-OPEC output expansion. It may be needless to saythat there has been a sharp expansion in production of unconventional shale (tight) oil behind theU.S. output increase.
Amid the shale gas revolution, horizontal drilling and hydraulic fracturing technology forshale gas production have successfully contributed to expanding shale oil output. As gas prices havedeclined remarkably with oil prices remaining high, economic interests have grown on shale oil
output to be expanded in the U.S. upstream sector. Under such situation, upstream investment hasprospered in Bakken and other major shale oil fields, contributing much to overall U.S. oil output
growth.
The U.S. shale oil production expansion is expected by many people to continue for theimmediate future. The U.S. oil output growth (and oil demand fall) may have to be watched as a key
factor affecting the global oil supply-demand balance. But it is important to recognize high oil prices
as a factor behind the U.S. production expansion. High oil prices have become a key incentive forinvestment in expanding shale oil output. While shale oil production costs are reported as high, shaleoil (and gas) fields feature high depletion rates. Given these points, we may have to keep close watch
on how crude oil price changes would affect the future U.S. oil production expansion pace.
The current conditions including high crude oil prices and OPEC output above 31 million
bpd are favorable for OPEC to secure robust oil revenues. The 12 OPEC members’ output in Octobercame to 31.16 million bpd, remaining above 31 million bpd since the beginning of the year. As amatter of fact, however, Iran’s output has substantially declined on economic sanctions led by theUnited States and Europe, while some other OPEC members such as Saudi Arabia and Iraq have
expanded output to make up for the decline. We should pay attention to such remarkable changes in
the country-by-country breakdown of OPEC crude oil output.
But the high production level has far exceeded the 12 OPEC members’ output ceiling at 30
million bpd. It also represents a wide excess over the call on OPEC for 2012, which is also estimatedat 30 million bpd based on global oil demand, non-OPEC oil output and OPEC natural gas liquidproduction. In this sense, the global oil supply-demand balance might have eased so far in 2012. At
the same time, we see a growingly strong incentive for OPEC to maintain crude oil prices at thepresent high levels. For Persian Gulf oil producing countries, particularly, crude oil price levels
required to achieve balanced budgets might have steadily risen on a social spending expansion tostabilize their domestic situations under the impact of the Arab Spring.
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Under such situation, OPEC is likely to take oil supply and demand adjustment and othermarket measures while watching changes in the supply-demand balance and in crude oil prices. The
current conditions are favorable for OPEC at present, indicating that OPEC is unlikely to make any
major policy change at its next meeting on December 12. But how OPEC will respond to market
changes in and after 2013 will attract much attention.
Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

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