High oil prices do not spell oil crisis

14:46, April 08, 2011      

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The recent geo-political instability in West Asia and North Africa as well as the tsunami and nuclear leakage triggered by the strong earthquake in Japan have led to soaring international oil prices. Given the rising global inflationary pressure and the deteriorating international development environment, the world should be well prepared to deal with sustained high oil prices. However, this will not lead to an outbreak of a global oil crisis and the faltering of the world economic recovery.

The current panic over rising oil prices stems from the turmoil in West Asia and North Africa caused by the social unrest in Tunisia. As Tunisia is rich in petroleum and gas resources and located in an important strategic position, the sustained turmoil in this region will inevitably lead to diplomatic games, geo-political changes and energy structure adjustments.

The main reasons for the soaring oil prices are the following: West Asia and North Africa’s oil production, the amount of crude oil reserves, and output and trade volume account for 57 percent, more than 41 percent and 40 percent of the world's total, respectively.

In regards to oil transport, countries in West Asia and North Africa, such as Bahrain, which is on the mouth of the Persian Gulf; Yemen, located on the mouth of the Red Sea; Egypt, which controls the Suez Canal and Iran, which guards the Hormuz Strait, are all important oil transport hubs.

From the perspective of oil supply, the sustained world economic recovery resulted in oil demand recovering faster than oil supply. The market fundamentals are tight and any sign of disturbance will lead to a rise in oil prices.

There is also the factor of speculation. In recent years, the price of grain, minerals and precious metals increased one after another, while the growth of the oil price was relatively low. In addition, as there is an extreme surplus in global liquidity, the chaos in West Asia and North Africa just provided an opportunity for hot money speculation.

Recently, crude oil futures increased sharply in the market, hitting a record high. Companies such as Goldman Sachs and Morgan Stanley also "sang up" oil prices to add fuel to the fire.

The continuous "quantitative easing" and low interest rates of the United States has led to a weak dollar. This has without a doubt been a catalyst for the high oil prices.

In addition, as a result of the Japan earthquake that triggered a devastating tsunami and a nuclear catastrophe, the reconstruction in Japan is difficult and demands more oil.

However, the probability is low for the outbreak of a global oil crisis, unless the unrest hits the leading oil producing county Saudi Arabia or blocks the Straits of Hormuz, a major oil-shipping route.

The first reason is that the Organization of the Petroleum Exporting Countries (OPEC) has sufficient surplus oil output capacities. OPEC has pledged to increase the supply anytime to satisfy the market demand. OPEC’s current surplus output capacity of 5.2 million barrels per day is enough to offset the gap due to the suspension of oil supply from Libya.

The second reason is the increased oil output capacities of non-OPEC countries. The International Energy Agency (IEA) has raised the estimation of crude oil supply from non-OPEC countries to 54 million barrels per day, because of their increased output capacities, particularly in North America.

The adequate oil reserves of the Organization for Economic Co-operation and Development (OECD) is the third reason. Statistics from the IEA show that commercial crude oil reserves in the OECD stood at 2.7 billion barrels and governments' strategic petroleum reserves at 1.6 billion barrels at the end of 2010, which is equivalent to 95 days of consumption or 146 days of net imports, far more than the 90 days equivalent of net imports required by the IEA.

The fourth reason is the possible shrinkage in the market demand. Given the uncertainties in the recovery of the world economy and the international community’s efforts to promote energy efficiency and emissions reduction, high oil prices will reduce demand, putting pressure on high oil prices.

To sum up, the political turmoil and the Japan earthquake may cause oil prices to rise by 10 to 15 U.S. dollars per barrel for some time to come. Oil prices may basically fluctuate between 90 and 120 U.S. dollars per barrel this year, but it is also possible the prices may drop to 70 to 80 U.S. dollars per barrel, or shoot up to 130 to 150 U.S. dollars per barrel. The annual average oil price in 2011 is more likely to be around 95 dollars a barrel.

The International Monetary Fund recently estimated the annual average price of Brent Crude in 2011 at nearly 95 dollars a barrel, an increase of over 10 dollars per barrel from 2010, so far the closest price level to its all-time high of over 97 dollars a barrel in 2008.

Multiple measures should be taken to combat the soaring oil prices, including promoting energy conservation and low-energy-consumption industries, fostering the development of alternative energy and making wise use of strategic petroleum reserves.

In short, only by increasing energy supply, promoting energy conservation and transforming the development pattern simultaneously will mankind's production and living styles be fundamentally changed and the perennial oil price problem be completely solved.

(The author is the director of the Institute of World Economic Studies under the China Institutes of Contemporary International Relations.)

By People's Daily Online
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