Text size:

  • Small
  • Normal
  • Large
Emirates Airline was named in the top 10 first class cabins by therichest.com. Find out what position it came here.

A return to $150 oil may come sooner than we think

When Barack Obama, the US president, arrives in Saudi Arabia next week, he might carry an unexpected message for King Abdullah.

When Barack Obama, the US president, arrives in Saudi Arabia next week, he might carry an unexpected message for King Abdullah.Oil prices, he could tell the king, are too low! Forget all the hot air from the International Energy Agency, which yesterday warned that the latest jump in oil threatens the recovery. The US, and indeed the rest of the industrialised world, has decided the cost of fossil fuels must rise to save the planet.

This is one interpretation of the proposal Mr Obama sent to Congress to set up a system of "cap and trade" for carbon emissions. It provides a clear incentive for energy users to turn their back on carbon-based fuels such as oil, gas and coal, and move decisively to renewables and nuclear power, simply by increasing the cost.The free market has not incorporated the environmental cost of climate change into the price of a barrel, so the US government is doing it instead.

At first, the cost of a carbon credit might be low, but over time the price will undoubtedly rise as political opposition wanes and the world's largest energy user joins itself with the successor to the Kyoto protocol. The challenge for oil exporters here is to make sure they get their fair share of the increase.King Abdullah might take heart from these thoughts, having pinned his colours to the mast last December, when he said US$75 was a fair price for crude oil.

But many in OPEC and elsewhere have yet to see the logic of a higher oil price, even as consuming countries have come around to the idea.The recent jump in oil prices to a six-month high at a time when demand was falling and inventories were brimming had many at OPEC's policy meeting in Vienna last week scratching their heads.One veteran oil market analyst confided in me that all his sifting through data for tiny shifts in tanker traffic, inventory levels and consumption was a waste of time when prices were reacting to shifts in capital flows out of US treasuries and into equities and commodities.

OPEC ministers and officials, who one might expect to be happy to see their informal target nearly reached so quickly after their last output cut in January, publicly denounced the presence of unwanted speculators in the market.King Abdullah's $75 target seemed like a big ask at a time when the economy was in free fall and prices were hurtling down towards $30. But today it is looking rather modest.

The question on everyone's lips is: "If prices are at $68 a barrel when demand is so weak, where will they go when the economy recovers?"The Saudi minister, Ali al Naimi, saw no shadows in the market. Beaming a smile in the Viennese sunshine, he simply said markets were reacting to the first signs of an economic recovery, starting in Asia where refineries were already asking for more supply of crude oil.

Inventories might be high today, but the balance of supply and demand is inexorably shifting and rising demand should drain surplus stocks by the end of the year, he predicted confidently.Climate change apart, arguments for a higher oil price are actually quite persuasive.Paul Horsnell, the head of commodities research at Barclays Capital, sees a shift in consumption growth since 2002 with the focus moving from industrialised to emerging markets. OPEC has a proven record of defending its price floor with supply cuts, while new capacity gets costlier as oil discoveries become more marginal.

Mr Horsnell is already considering raising his forecast for the fourth quarter, which now stands at $76.Few dared to put a number on their longer-term predictions, but the investment bank Cazenove saw oil reaching $100 within two years.Mr al Naimi predicted a spike to last year's record of $147 or higher within two or three years if investments in new capacity did not materialise. As Mr Obama seems to have realised, energy prices need to stay permanently in a much higher range to provide the necessary incentive to extract enough oil and invest in alternatives.

The world's major consumer governments, which only five years ago were bitterly opposed to oil over $50, appear to have completely accepted this new reality. The French economy minister, for example, said last month that anywhere between $70 and $80 for a barrel of oil was "good for everybody".However, this new reality comes not without risks for oil exporters. Implicit in the climate change policy is a new determination to cut dependence on carbon fuels. The Saudi king will not have forgotten Mr Obama's campaign pledge to end imports of Middle-Eastern oil within a decade.

Oil demand may continue to grow for decades in Asia, but the new noises from the industrialised world should serve as a reminder of the risks to the lifespan of the oil era. It reinforces the need for oil exporters to diversify their income streams so that they, too, can declare freedom from reliance on oil.The good news for oil exporters is that they should have plenty of money to do so in the meantime, if they play their cards right.

tashby@thenational.ae

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 Three generations of the Hakimi family tend to their stall Crawford Market in Mumbai. Subhash Sharma for The National

In pictures: Shopper’s delight at Crawford Market in Mumbai

Crawford Market is an old British-style covered market dealing in just about every kind of fresh food and domestic animal imaginable. Later on renamed Mahatma Jotirao Phule, the market remains popular among locals and visitors by its old name, taken from Arthur Crawford who was the first municipal commissioner of the city.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National