$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.
ABOUT THIS BLOGJohn 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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