Marketplace Middle East - Blog
4/25/08
$120 - a new and worrying number

During the rush of the Pennsylvania primary, a $100 billion mortgage bailout in London and the global wake up call of higher food prices, oil prices quietly nudged up against a new threshold of $120 a barrel.

The unlikely source for news this week came out of Rome, one of the world’s most beautiful cities and a place I fortunately called home for four years. This week producing and consuming nation representatives gathered for the International Energy Forum, where they debated what future demand may be during a period of economic slowdown.

The 13 members of OPEC, ranging from Indonesia in the east, Venezuela in the west and giant Saudi Arabia in between, provide about 30 million barrels of today’s daily demand of roughly 85 million barrels. Of the 13 countries, oil executives and analysts say only Saudi Arabia has the excess capacity to meet the needs with China and India still growing at 8 percent or more.

However, if one reads between the lines of the comments coming out of the eternal city this week, there has not been a rush by the Kingdom or other players from OPEC to invest in developing excess capacity. If you can be paid nearly $120 a barrel for your existing production or $80 if you put more oil on the market, what would you choose?

Saudi Arabia is producing roughly 9 million barrels a day. At $120 dollars, it will make over $1 billion dollars a day; at $80 dollars subtract roughly about 30 percent of that. That, as they say in the U.S., is some serious money. Knowing that simple math, G8 consuming nations have increased the calls for more production to the market. It is not as easy as basically opening the taps a bit more.

Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani who was a guest on Marketplace Middle East recently, put today’s excess capacity within the cartel at 300,000 to 500,000 barrels a day. That provides some cushion, but will not reverse the rise in prices over the past two years, for two key reasons.

While in Dubai I had a chance to talk to Martin Lovegrove Vice Chairman of Oil & Gas at Standard Chartered bank about the ingredients of the recent surge. Lovegrove broke down current demand in the market for oil overall. He reckons that $20 of the current price is a result of a 38 percent drop in the dollar since 2003. Another $20 is based on a surge of investment fund capital riding the wave of commodity prices. With equity and now real estate prices softening, the hot money has gone into, and will likely stay, in oil.

So $40 of the roughly $120 we see today has nothing to do with supply and demand.

OPEC Secretary General Abdalla Salem el-Badri tried to assuage leaders this week in Rome when he confidently stated that the cartel will be able to add another five million barrels a day to the market in the next five years.

While politicians are looking to calm consumer jitters, Badri did not seem to share their sense of urgency and said, “There are some problems, maybe a delay of a year or two … but it will come. I am not disturbed at all. I would like to assure the world that all the countries are investing.”

To do so, they are committing to spending $160 billion on infrastructure to expand production. That is about half of what Saudi Arabia takes in each year at today’s prices. The investment certainly won’t break their bank or others within the OPEC group of nations and as we now know from OPEC’s secretary general, will not erase the new target for oil traders of $120 dollars a barrel.
An excellent article, which raises issues about the OPEC nations but more importantly, and unstated, about our own North American governments and their intentional or unintentional unpreparedness for the protection of the citizenry and national energy needs given the fact that any long-term market, industry, and technological analysis would have rendered the implicit requirement for the OPEC and other oil producing nations to keep updating their exisitng production and distribution technologies and infrastructures.

Or, perhaps, such information was indeed available to the North American governments, and was simply ignored. Leaving men such as as former Vice President Al Gore much more than a Noble Prize Winner and Environment Activist but a true patriot who has pushed the citizenry to awaken to the hazard of dependency on foreign natural resources and the importance of developing renewable resources not simply for environmental and social benefits but perhaps to those who are not moved by the former appeals, for economic and political purposes.

Due to the fact that regardless of the outcome of the DNC primary election, Senator and President Clinton have fatally damaged yet another Democratic nominee, this time, Senator Obama, future President McCain, should move now to start working with a broad based and inclusive bi-partisan committee to design the future policy that will allow for America to overcome the dependency upon foreign oil and prosper in a new age, perhaps in the next generation, of alternative energy and environmentally friendly corporate as well as consumer practices.
This article is excellent because it raises important issues but also makes me think about the future of oil industry.

This crisis will perhaps allow for America and Europe to try to overcome the dependency upon foreign oil and prosper in the next generation, of alternative energy (renewable energies)and environmentally friendly corporate as well as consumer practices.

The fact that oil is becomng so expensive might change the consumer practices - It might have an influence on our way to consume energy in western countries.

As we say in France, it is the evil for the good.

With the explosion of prices (127dollars a barrel !) , the oil exploration becomes again profitable in Germany

In France, the French values string together a 6th session of consecutive rise, in spite of the fall of the American markets on Friday evening, then the steadiness of oil prices (with a barrel which nudged up against a new threshold of.$127 )-

Across the Rhine, the companies of extraction rediscover the “charms” of oil which sleeps in subsoil. A craze which is due to the record prices of the crude oil.

At the end of April, Resources Activa company began works of exploration in the South of Bavaria. The company, which up to now exploited some oil only in Texas, obtained from the Bavarian ministry of economics a concession for a plot of land of about 2 000 km2.

More generally, " licenses of exploration were issued in more large number these last months ", observes Michael Pasternak, from the regional office of Lower Saxony for the Mining, Energy and Geology Industry ( LBEG).

According to the expert, who draws up an annual report on the oil and gas sector in Germany,
" new demands are going to be submitted, considering the prices of the crude oil ". With a barrel which reaches 127 dollars, enthusiasm of the companies for the German subsoil is quite understandable. Because the country is not renowned neither for the quantity nor for the size of its oil fields.

In 2007, about 3,5 million tons of crude oil were produced in Germany. That is 3 % of the national oil consumption.

" The new attractiveness of the German oil is indisputable, summarizes Mr Pasternak. But it will be necessary to wait to see if the obtained results are really significant. "
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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