Marketplace Middle East - Blog
Barrels of Concern

When we were in school doing our maths, our teachers always instructed us to use a pencil and not a pen in case we made mistakes. It was impossible to erase a miscalculation back then. Those who are making economic and energy forecasts right now might be wise to do the same.

The Paris-based energy advisor to the 30 industrialized countries of the OECD, the International Energy Agency, cut its demand forecast for the third month in a row and is basically saying there will be very little if any growth in oil demand for 2009. This is not entirely surprising since the OECD itself is forecasting a slight contraction for its 30 members next year. This is a big change from their June forecast of 1.7 percent growth.

With as much exuberance on the way up to $147 in July, we are witnessing equal pessimism on the way down to $55 a barrel. The internal tussle within OPEC back in July was supplying more oil to meet demand. Today, the 13 members cannot scale back fast enough. After trimming production by one and a half million barrels a day since September, they are looking at another emergency meeting for the end of November in Cairo. Playing catch up with the markets is always a frustrating game, and that is the one being played out today.

If we continue along this path, don’t be surprised if the six and a half percent growth earmarked by the International Monetary Fund for the Middle East gets crossed out shortly for a lower number. That will spill over to the property sector where we are starting to see 10-20 percent falls for villas and flats in Dubai. Officially we don’t know how leveraged some of these companies are, but there is a lot of discussion off-line that provides a pretty good indication.

In the meantime, OPEC members will do their level best to find the middle ground. While on a trip to Cyprus for bi-lateral meetings, the Prime Minister of Qatar, Sheikh Hamad Bin Jassim Bin Jabr Al-Thani reiterated his call for a trading band, "We think that $70 to $90 is a fair price because you need to keep new exploration to go on and as you know, the investment in the oil is expensive.”

That appears to be the Goldilocks scenario for OPEC: not too hot, not too cold, but just right. Right now, regional producers still make plenty of money at $55, but they are losing $2 billion dollars a day from the go-go times of July -- that’s three quarters of a trillion dollars a year.

Power in Reserves

In their World Energy Outlook, the IEA projected spending of $24 trillion in energy between now and 2030 to meet the demands of the fast developing countries from Asia to Latin America. I found it interesting that only a quarter of that (he says lightly) is forecasted to be spent on oil and gas. Half is forecasted to be spent on power generation and a good slice of the total on conservation.

The IEA sees demand growing from 86 million barrels a day to over 100 million in that time frame. Make no doubt about it, with 78 percent of the proven reserves today, OPEC will be in the driver’s seat once the doom and gloom clears -- whether it is in 2010 or a tad later. Non-OPEC oil fields are reportedly depleting by six percent a year now. That is expected to jump to eight percent in the next two decades.

If that is the case and this forecast holds up, the IEA believes oil will average $100 a barrel between now and 2015. By 2030, the agency is expecting today’s barrel of oil to be priced at $200.

In the meantime, a projected $450 billion is needed to develop reserves that have been identified and even more to find those which have not. At today’s prices that is a tall order. Let’s hope that the Goldilocks scenario returns fast so forecasters can rework their numbers up, rather than down yet again.

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I believe that the extrication of the US from foreign energy (oil) will not be as easy when the price of oil is as low as it is today. A long time ago, one of the main reasons we imported oil was that it was cheaper to import than to find, refine, and use our own oil. Is this still true?
We have to look past whatever the price is, and concentrate on what will happen to the earth if we keep using oil; what will happen to economies when the oil runs out. The Chevy Volt is not a viable answer when the estimated price is more than what 95% of the market will be able to pay for a "green" automobile. There have to be other, more affordable choices in new or retooled vehicles.
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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