Text size:

  • Small
  • Normal
  • Large
Brent fell to below $102 per barrel on Friday. AP Photo / Hasan Jamali
Brent fell to below $102 per barrel on Friday. AP Photo / Hasan Jamali

Stable oil prices will not be staying that way much longer

Oil prices have been remarkably steady for the past three years. But the eerie silence is set to end, and the trend is downwards.

For a commodity usually described as "volatile", oil prices have been eerily stable over the past three years - averaging US$111.26 in 2011, $111.57 in 2012, and $111.89 so far in 2013. Despite the revolution in Libya, stringent sanctions on Iran and Japan's nuclear shutdown, the oil market has remained remarkably steady.

Yet on Friday, Brent oil prices fell sharply to under $102 per barrel, their lowest level for nine months.

This came in response to downgrades of global oil demand by the producers' and consumers' representatives: Opec, the Energy Information Administration in the United States and the International Energy Agency. They were particularly concerned about weak demand in Europe and Japan, as the economic crisis drags on.

Is the current price too high? And are the oil exporters risking a repeat of the crashes of 1986 or 2008? Experience from the 1970s and '80s suggests that it is hard for high-cost non-Opec supplies alone to trigger an oil price crash. But a price slump can be caused by a combination of swelling output outside the producers' organisation, intra-Opec competition in a scramble for markets and a drawn-out fall in demand.

The Saudi oil minister Ali Al Naimi has repeatedly described $100 as a "fair" price for both consumers and producers. But in 2001, he said $25 was fair; in 2004, $34; in 2008, $75 per barrel. The question is not fairness, but what price best balances short-term budgetary needs with long-term demand for Saudi oil.

Much is made of Saudi Arabia's supposed budgetary break-even price of about $90 per barrel. But what is often missed is that the target is a combination both of price and export volumes. Riyadh's budget can break even at $89 per barrel when the kingdom produces 9 million barrels per day (bpd), but if it has to cut back to 8 million bpd, it needs $103 per barrel.

The problem is that the current price makes oil exporters critically dependent on the continuing expansion of a few Asian consumers - China above all - and ensures a virtually stagnant market for Opec's crude.

Meanwhile, there is growing interest in gas as a fuel for ships and cars.

Non-Opec producers, especially US shale oil and Canadian oil sands continue to grow strongly.

Opec may think it can easily drive high-cost crude out of the market. But as technology and logistics improve, it is more likely that the unconventional oil revolution will be surprisingly robust, even if prices fall.

Australia, Argentina and Russia are candidates to be the next shale oil giant.

When certain Opec members - Libya, Nigeria or Iran - are suffering disruptions, there is room for the others.

But Iraq above all, plus Libya, Kuwait, the UAE and perhaps a post-Chávez Venezuela, all have plans for major growth.

The Saudis, already uncomfortable with rising Iraqi production, have cut back their own output from about 10 million bpd in the middle of last year, to just above 9 million bpd.

Greater supplies from Iraq have filled the gap left by Iranian exports - but further US moves to tighten the noose are met with evasion from the Iranians and their customers.

Oil prices' eerie calm may well persist during this year - Saudi Arabia still has room to cut back. The danger is less a price crash, more a prolonged slide.

At some point, Riyadh will weary of making room for its political adversaries in Baghdad.

For the major GCC producers with the luxury of long-term thinking, now may be time to coordinate on a more sustainable price - that permits economic and demand growth, and warns off high-cost competitors.

That price might be $80 per barrel today - it will be lower tomorrow.

 

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon

Back to the top

More articles


Editor's Picks

 Would you like it in blue? An Afghan shopkeeper shows a burqa to a customer at a bazaar in Herat. (Aref Karimi / AFP /  April 13, 2014)

In pictures: Best business images for the week to April 24, 2014

Here are some of the best business images for the week to April 24, 2014.

 That's asking a lot: this four-bedroom duplex penthouse apartment  at Marina Residence in Dubai is for sale with an asking price of Dh15.7 million. (Courtesy Better Homes / April 2014)

In pictures: Palm Jumeirah penthouse listed for Dh15.7 million

A four-bedroom duplex penthouse in Marina Residence 3 on Dubai's Palm Jumeirah is on the market for Dh15.7 million.

 Room with a view from one of the 21 duplex penthouses located in the Gate Towers sky-bridge. The sports courts and swimming pools can be seen below. Courtesy Alda

In pictures: Aldar’s Gate Towers Penthouse Collection on Reem Island

Aldar launched its Gate Towers Penthouse Collection at Cityscape Abu Dhabi. The launch features 21 penthouses spanning the skybridge, with each having a private indoor pool and incredible views.

 Marina Square apartments Reem Island: Q1 2% rise. Studio - Dh65-68,000. 1BR - Dh75-95,000. 2BR - Dh110-145,000. 3BR - Dh170-190,000. Q1 2013-Q1 2014 no change. Sammy Dallal / The National

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

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

 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