Higher Oil Prices: A New Era
Walid Khadduri Al-Hayat - 09/04/07//
The prices of crude oil have risen once again in the past days and weeks to reach levels recorded in the mid 1960s, confirming available data and suggesting that prices will remain high in the foreseeable future [above the 50 dollar per barrel mark, which is the price OPEC member countries are seen likely to defend].
The recent surge in prices was fueled by international tension over Iran, particularly its nuclear file and the capture of the British sailors, as well as market concerns over the possibility of a military conflict that might impede oil exports from Iran, or even Arabian Gulf countries' oil exports if the Strait of Hormuz is closed to international navigation.
However, market concerns are not limited to the Iranian standoff, but extend further to problems experienced by Nigeria, where nearly 70 foreign oil workers have been kidnapped since the beginning of the year, a majority of which were freed in exchange for ransom money. Further unrest is expected over the next month, where presidential elections are scheduled to take place in Africa's largest oil producer.
Western circles, particularly major oil companies, have further concerns over future oil exploration and drilling contracts in Russia and Venezuela, as well as the extent of the credibility of the oil bill in Iraq in light of the deteriorating security conditions and the political uncertainties in the southern part of Iraq.
However, structural changes in oil prices were also fueled by purely economic factors, including the sustained economic growth in China and the US, the growing demand for fuel by both countries, as well as by oil-producing countries in the Middle East and certain parts of Asia.
There are also concerns over the possibility of an increase in oil prices that would continue for years, and the impact of this on demand in the foreseeable future and, consequently, on prices.
These factors coincided with failed forecasts of increased production from non OPEC countries and the continued reliance on new oil from OPEC member States to meet higher demands. Despite the notable increase in production from Kazakhstan and Sudan, such increments failed to offset the shortage from the North Sea, the US and Mexico.
In this context, the key role played by the OPEC in recent years in terms of the stringent surveillance of factors shaping supply and demand, the levels of commercial reserves, and the prompt and timely response to developments through the adoption of a collective and transparent production policy deserves to be underscored.
An example of the impact of this policy was seen during the last OPEC ministerial meeting when the OPEC board of ministers decided to cut output due to the increase in the levels of international commercial reserves and the negative impact of this increase on prices.
Moreover, the continued political unrest in any given oil-producing country is expected to lead to the setting of a minimum threshold, below which prices cannot go lower for extended periods of time.
This trend is expected to be maintained by the continuous growth of the international economy, which will also lead to an increase in demand and an affirmative and prompt response by OPEC to markets.
*Dr Walid Khadduri is an energy expert and Director of Al-Hayat Business Desk.
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