International Energy Agency: Oil supplies sufficient
Walid Khadduri Al-Hayat - 18/05/08//
In its monthly report that came out last week, the International Energy Agency (IEA) announced that oil supplies were sufficient and that the primary cause for the current big hikes in prices are the result of the attempts by industrial countries to secure sufficient oil reserves along with meeting domestic consumer demand. The International Energy Agency represents oil-consuming industrial countries in international economic circles.
The IEA also indicated the growing calls to increase oil supply as the price of oil reached $125 per barrel. But do we really need more oil? The answer to this question according to the IEA lies in the fact that a closer look at the balance of supply, demand and future risks, it becomes clear that the reason behind the price hike is the increasing demand and not supply shortages.
The report also indicated up to date data and forecasts confirming a surplus in oil markets during the past two months. It expected this surplus to persist throughout the year in case OPEC decided to maintain the same level of production. The IEA also added that demand rates in the US are dropping gradually and expected this decline to continue, and the same with the patterns of high demand in China and the Middle East.
However, it also pointed out that consuming countries are calling up on OPEC to increase production to reduce prices. This is true, according to the IEA, since increasing production will raise the level of available reserves in consuming countries which in turn will lead to improving the performance of refineries and hence the prices of oil products. OPEC, however, asserts that supplies in the market are sufficient and that the current situation suits the increase in reserves.
The IEA concluded its discussion of the subject by confirming that the past 18 months have been dedicated to the discussion of the subject: are the oil reserves of consuming countries sufficient, and is the timing of the decision to raise the reserves appropriate? It is generally believed that the market can only express its need for sufficient reserves through price. Hence, if supplies allocated for reserves run short, prices increase, and if a few consuming nations insist on a certain level of reserves, they would have to compete against consumer demand which in turn would raise prices.
In addition to reserve levels, the IEA also added another factor influencing prices, namely the perceptions of traders in futures, that is, speculation.
The IEA monthly report came out prior to President George Bush's visit to the Middle East this week. Despite his unusually busy schedule (the peace process between Palestine and Israel, the Iranian challenge, Iraq, and Lebanon), especially during a presidential election season in the United States, President Bush did not forget to say, during his visit to Saudi Arabia, that oil supplies from Saudi Arabia and other OPEC member countries are insufficient, hence calling for an increase in production to reduce price levels.
Bush had made the same announcement in his last visit to Riyadh and Abu Dhabi, and he is likely to raise it again during his current visit to Riyadh despite the clear report from the IEA. The reason for his repeating and confirming this issue is his lacking of a persuading and practical argument to address prices that do not involve making difficult decisions that differ completely from the shabby slogans raised by the Republicans and Democrats during election seasons, mainly reducing foreign oil imports, especially Arab oil.
In this context, it is worth referring to what the IEA casually mentioned, namely the impact of speculations on the rapid price hikes. The New York-based Integrated Oil Update bulletin indicated that crude oil futures dealings (speculation) at New York's NYMEX and London's ICE were up from about $9.5 billion per day five years ago to almost $86 billion barrels a day last year, then to $140 billion per day earlier this year.
Once again, these figure are a reminder of what OPEC ministers continue to say and confirms the credibility of their claims and arguments, namely that the record hikes in oil prices are not caused by supply shortages, and that a major factor behind these hikes is the element of speculation which does not take into consideration the demand and supply market fundamentals but rather responds more to rumors and future political and economic fears more than any other element.
Speculators and investors benefit from positive or negative price speculations, depending on the nature of their investments and bets, and market dealers increasingly respond to reports published by research departments at financial institutions such as the report recently published by Goldman Sachs which warned about the possibility of prices rising to the $150-$200 range within six months to two years.
Evidently, with the actual depreciation in the value of the US dollar, the decline in international stock markets, and the inflation wave, such a forecast further pushes speculators to invest their capital in oil markets which in turn pushes oil prices to new record levels. These forecasts are now driving the market more than the market fundamentals and their effects. None of the politicians seems willing today to face this dilemma because it is directly related to the freedom of markets and globalization.
The issue does not only have to do with the debate between oil exporters and consumers. The issue is far more serious, especially since the September 11 attacks on New York and Washington and the wars that ensued. It is not clear how far consumers in the Third World, or even in industrial countries, absorb this insane rise in prices. I do not believe that any oil officials had fathomed the possibility of reaching such record price levels in such a short period. The fear now is of when a negative response to these prices will occur. It is believed that these responses have already revealed themselves through the violent demonstrations and the increasing social and political turbulences everywhere. What then will the case be if prices reached $200 or more? How would this impact those with limited incomes and the retired? How would they manage the affairs of their daily lives?
What is needed is a new type of dialogue between producers and consumers, especially now that the IEA has admitted that supplies in the market are sufficient to meet consumer demand. The problem lies in acquiring sufficient supplies for oil reserves in industrial countries, especially as OPEC countries have previously proven their capacity and willingness to immediately compensate markets for any urgent shortage.
Raising the issue of reserves in industrial countries is no novelty, but it takes on different dimensions this time with record prices which should be carefully studied and reviewed as they constitute new pressures on OPEC member states. Hence, a new form of dialogue is needed between the two sides, one that takes into consideration their fundamental interest and the social security of the neighboring nations of them both. The increasing feeling of poverty in Third World countries will only increase immigration to industrial countries, a matter that these countries are trying to avoid. At the same time, oil-producing countries are weary of the turbulences in Third World countries surrounding them and which will sooner or later influence their national security given the nature of regional interdependence.
*Energy Expert
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