Middle East Economic Survey
VOL. L
No 36
10-
OP-ED/ DOCUMENTS
Oil Prices, Supply And Demand – A Dilemma Of Forecast
By Salman Ghouri
The following article was written for MEES by Dr Ghouri, Senior Economist with Qatar Petroleum (QP). The views expressed in this article are those of the author and may not reflect the views of QP.
In its August 2007 report the International Energy Agency’s (IEA) global forecast of oil product demand remained unchanged at 86.0mn b/d in 2007 and 88.2mn b/d in 2008. This highlighted the fact that with volatility in financial markets elevating concerns about future demand, the last thing the global economy needed was higher oil prices. The IEA reiterated that “OPEC needs to increase its production sharply in the second half of this year to avoid a tight oil market. Undersupplying the market in this context could bear considerable risks.” In sharp contrast to the IEA, OPEC predicated that global oil demand was expected to be 85.72mn b/d in 2007 and 87.06mn b/d in 2008 – about 1.14mn b/d less than that of IEA.
Who is right? Only time will tell. Having said that, the rational approach would be to critically analyze the historical trends and try to come up with some appropriate answer after taking into account the most recent events.
Global oil demand witnessed a record increase of about 2.78mn b/d during 2004. The previous highest incremental demand of 1.9mn b/d was recorded in 1988, with 1.7mn b/d in 1986 and 1998 when oil prices were low. China accounted for about 1mn b/d of the 2004 increase. Prompted by strong Chinese oil demand, most international agencies (EIA, IEA and OPEC) predicted an even stronger global oil demand forecast for 2005-06, which was also one of the factor responsible for elevation in oil prices during that period (see graph). However in 2005-06 demand did not materialize as predicted – forcing international agencies to trim their forecasts for 2006 in their succeeding monthly reports.
Based on historical analysis, the current financial turbulence, the weak US economy, gradual withdrawing of oil subsidies in developing countries and high oil prices make it unlikely that global oil demand will increase by about 2.2mn b/d as predicted and more recently emphasized by the IEA in the media. Secondly, it is now a well established fact that higher oil prices are due to many factors – refining constraints, law and order situation in Nigeria, Iraq, US-Iran stand-off on the nuclear issue, hedge and pension funds, speculation, security of supply concerns, non-OPEC and OPEC production, oil stocks, hurricanes etc. OPEC members are comfortable with their production and quotas. Therefore, they are of the strong view that the market is well balanced and there is no need to inject more oil into the market, which could destabilize the market as the cases in the past.
If one agrees with the views of OPEC and the analysis above, then one is bound to ask: is the IEA trying to influence and pressurize OPEC members to increase production (“OPEC Must Increase Production, Says IEA” and “IEA Again Urges OPEC To Increase Oil Production” were typical headlines in major newspapers) in their forthcoming meeting of 11 September 2007? Or there is a real need to pump more OPEC oil? I leave it up to readers to draw their own conclusions.