IEEJ: April 2006

Prospects for the stability and oil policy inthe Middle East-Implication to the world oil marketProfessor Paul Stevens
Centre for Energy, Petroleum and Mineral
Law and Policy
University of Dundee
ScotlandIEEJ
13 April 2006
Tokyo
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IEEJ: April 2006

PRESENTATION OUTLINE• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?

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IEEJ: April 2006

Why are oil prices currently high?
MONTHLY OIL PRICES - OPEC BASKET
1983- February 2006
70U S$ per barrel

6050403020100320981993198819198303IN 2004 DOLLARS THE PRICE IN 1980 AVERAGED $82.15 (Brent)

IEEJ: April 2006

Why are oil prices currently high?
Unexpected demand increase
driven by exceptional GDP growthplus constrained supply

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IEEJ: April 2006

Unexpected demand increase driven by exceptional GDP BUT it is
not all the fault of China!
1995-2004 total growth in demand China 3.5 Mbd USA 3.0 Mbd
ANNUAL GROWTH IN WORLD OIL DEM AND
3500

THOUSAND B/D3000
2500
2000
1500
1000
5000-500

1995 1996

1997

CHINA1998 1999

USAREST

2000 2001

ESTIMATE

2002 2003

20042005 2006

AVERAGE OF 8 FORECASTS

5Source: 1995 – 2003 BP Statistical Review of world Energy 2005

IEEJ: April 2006

Unexpected demand increase driven by exceptional GDP growthplus constrained supply
In addition to increased demand for wet barrels there is also an
increase in demand for paper barrels-Speculation from concern about geo-politics andthe “Money Managers” moving into commodities-But there is a real change in the market attitude
to the future of oil prices reflected in the forward
curve

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IEEJ: April 2006

Change in the market attitude to futures prices.
Driven by ….
TIME CURVEOIL PRICE $ PER BARRE

80
7060

Mar-06

50Nov-05

40SUMMER 2004

30

FOUR YEARS AGO

20SIX YEARS AGO

1001234567

YEARS TO DELIVERY

Source: NYMEX

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IEEJ: April 2006

Unexpected demand increase plus constrained supply
Supply constrained by geo-politics, hurricanes plus delays toNon-Opec projects
NON-OPEC PRODUCTION GROWTH
1600
1400
1200
1000
800
600
400
200
0-200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006-400
NON-OPECFSUESTIMATE

AVERAGE OF 8 FORECASTS8Source: 1997-2004 BP Statistical Review of World Energy 2005

IEEJ: April 2006

AND there are refinery constraints increasing the price oflight sweet crude
REMEMBER light-sweet crude provides the headline
price – WTI/Nymex and Brent/ICE
Crude Oil Price Differentials
70
65
• XXX
55
50

wti

45

dubai

40
35
30

se
pt
no
Ja v
n06

jul

jul
se
pt
noJa v
n05
m
ar
m
ay

25

Jan04
m
arm
ay

$ Per barrel

609IEEJ: April 2006

PRESENTATION OUTLINE• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?

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IEEJ: April 2006

What are the short term prospects?

• Current inventory overhang– What is OPEC’s price target?
– Willingness to defend that target?

• Immediate downside risks– Demand collapse– What if the “Money managers” pull out?

• Immediate upside risks– Sudden supply loss – Iran (plus Iraq); Nigeria; …..
– Geo-politics and paper markets
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IEEJ: April 2006

PRESENTATION OUTLINE• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?

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IEEJ: April 2006

What are the medium term prospects?
In the past high oil prices resulted in …
• Recession reduced demand• Improved appliance efficiency and fuel switching reduced
demand• Increased supply because of greater ability and willingness toinvest by producers• Thus less consumption plus greater supply = oversupplied market
and prices fall – Markets work! But in the new world???? 13

IEEJ: April 2006

BUT IN THE NEW WORLD: Doubts over demand
destruction?
ANNUAL GROWTH IN WORLD OIL DEMAND
3500

THOUSAND B/D

3000
2500
2000
1500
1000
5000-500

1995 1996

1997

CHINA

1998 1999

USAREST2000 2001
ESTIMATE2002 2003

20042005 2006

AVERAGE OF 8 FORECASTS• Little sign of global economic slow-down although there are concerns• In the OECD all the easy fuel switching and improved oil efficiency
has been done
• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s.

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IEEJ: April 2006

THE DEVELOPING COUNTRIES MISSED OUT ON THE OIL SHOCKSOF THE 1970s

Real Domestic Oil Prices in Selected DevelopingCountries 1970 = 100
600

KOREA

1970 = 100

ARGENTINA
500

BRAZIL400

INDIA

INDONESIA
300200M ALAYSIAM EXICOPAKISTAN
100197019721974197619781980198219841986198819900Source: Computed from Lawrence Berkeley Laboratories data 1989

PHILIPPINESTAIWANTHAILANVENEZUELA15

KG OIL EQUIVELENT NEEDED T O
PRODUCE $1 GDP

1.6
1.4
1.2
10.8
0.6
0.4
0.2
0

Source:World Bank
LOW INCOM E

M IDDLE INCOM E

HIGH INCOM E

KENYA

INDIA

PAKISTANINDONESIA

M EXICOPHILIPPINESTHAILAND

M ALAYSIAARGENTINA

KOREABRAZIL

USA

UK

FRANCEGERM ANY

JAPANIEEJ: April 2006

COMMERCIAL ENERGY INTENSITIES16IEEJ: April 2006

BUT IN THE NEW WORLD: Doubts over demand
destruction?
ANNUAL GROWTH IN WORLD OIL DEMAND
3500

THOUSAND B/D

3000
2500
2000
1500
1000
500
0-500

1995 1996

1997

CHINA

1998 1999

USA

REST

2000 2001
ESTIMATE

2002 2003

20042005 2006

AVERAGE OF 8 FORECASTS• Little sign of global economic slow-down although there are concerns• In the OECD all the easy fuel switching and improved oil efficiency
has been done
• But Emerging Market Economies missed out on the oil shocks ofthe 1970’s and there is scope for using less oil BUT it will take time

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IEEJ: April 2006

BUT IN THE NEW WORLD: Will Non-OPEC supply respond?
NON-OPEC PRODUCTION GROWTH
1600
1400
1200
1000
800
600
400
200
0-200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-400
NON-OPECFSU

ESTIMATE

AVERAGE OF 8 FORECASTS

There are concerns about Russia-Political uncertainty-New fiscal system
The estimates for 2006 are probably over stated-Remember a the start of 2005 the same average of 8 forecasts
estimated Non-OPEC for 2005 at 1.4 Mb/d. The outcome wasonly 0.4 Mb/d18

IEEJ: April 2006

BUT IN THE NEW WORLD:
Non-OPEC supply is not responding because of insufficientinvestment• International oil companies– Returning money to the shareholders – In 2005 the top six IOCs
will invest $54 billion BUT they will buy back $40 billion of shares anddeclare a dividend of $31 billion.

• REMEMBER “VALUE BASED MANAGEMENT” IS
RELATIVELY NEW i.e. During the 1990s• WHY ARE RETURNS SO POOR?
– Problems in the downstream– Progressive fiscal systems– Problems of getting access to low cost reserves
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IEEJ: April 2006

BUT IN THE NEW WORLD:
Non-OPEC supply is not responding because ofinsufficient investment• International oil companies– Returning money to the shareholders– Managerially constrained because of “downsizing”.
• Since 1981, over 70% of the workforce of the top 25 oil companies havebeen laid off– Service industry insufficient capacity because of monopsonyand Ecommerce.
• In 2002-3, the lead time to hire a jack-up rig averaged around sevenmonths. Now the delay is over two years.

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IEEJ: April 2006

BUT IN THE NEW WORLD:
Supply is not responding because of insufficient investment• International oil companies• OPEC national oil companies have plans but face seriousconstraints

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IEEJ: April 2006

OPEC Plans –But there are constraints

Country Gross Increment 2005-6(000 b/d)
• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200
• Venezuela 175• OPEC NGL 600• TOTAL 3170
• Source IEA November 2005

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IEEJ: April 2006

OPEC Plans –But there are constraints

Country Gross Increment 2005-6(000 b/d)
• Algeria 255• Indonesia 85• Iran 370• Kuwait 300• Libya 150• Nigeria 485• Qatar 100• Saudi Arabia 450• UAE 200
• Venezuela 175• OPEC NGL 600• TOTAL 3170
• Source IEA November 2005•

Service industry constraints•

Capital access constraints because NOCs are seen
as high cost and inefficient “rent seekers”•

Concern over security of demand after George W
Bush’s State of the Union Address•

Iran and President Ahmadi-Nejad = chaos andanti-IOC and buy-backs and fear of sanctions•Venezuela – Chavez moving into election mode –PDVSA forced into social spending + fiscal squeeze•

Nigeria – Political unrest, tougher fiscal regime
unrealistic local content clauses•

Kuwait – Project Kuwait remains a politicalfootball•

Libya- unattractive fiscal terms and delayed23
reforms

IEEJ: April 2006

BUT IN THE NEW WORLD:
Supply is not responding because of insufficient investment• International oil companies• OPEC national oil companies have plans but face serious
constraints• What about the national oil companies of the Asian oil importers?

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IEEJ: April 2006

Conclusions for the medium term
• Investment upstream and downstream is unlikely
to be sufficient even with higher prices thus
supply constraints will remain…
• “Higher” prices are here to stay for a long time.
The issue is how high is “high” and how long is“long”? In the 1990’s prices averaged $19 perbarrel …
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IEEJ: April 2006

PRESENTATION OUTLINE• Why is the oil price currently high?
• What are the short term prospects?
• What are the medium term prospects?
• What are the long term prospects?

26

IEEJ: April 2006

What are the long term prospects?
• Eventually the market will respond– Demand in the developing countries willfall. There is still a lot of fuel oil used
under the boiler in those countries (4.9Mb/d in 2004
– Supply will increase and there will be anincrease in non-conventional liquids• But remember that the 1986 pricecollapse was 13 years after 1973
• But what if the peak oil argument iscorrect?
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IEEJ: April 2006

THANK YOU FOR YOUR ATTENTION
Professor Paul Stevens
Centre for Energy, Petroleum and Mineral
Law and Policy
University of Dundee
ScotlandContact: report@tky.ieej.or.jp

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