Opec long-term pro­jec­tions are wor­ry­ing

The Pak Banker - - Front Page - Saadal­lah Al Fathi

THE Or­gan­i­sa­tion of Pe­tro­leum Ex­port­ing Coun­tries (Opec) re­cently is­sued its an­nual World Oil Out­look and while the re­port may not please Opec pro­duc­ers, it might not overly dis­please them ei­ther. Right at the be­gin­ning, Opec says "On­go­ing geopo­lit­i­cal ten­sions, con­tin­u­ing ex­ces­sive spec­u­la­tion in oil mar­kets, a frag­ile fi­nan­cial and bank­ing sys­tem, an anaemic eco­nomic re­cov­ery de­spite the ex­tra­or­di­nary fis­cal and mone­tary sup­port, per­sis­tent high un­em­ploy­ment and so­cial un­rest in a num­ber of coun­tries have all made 2012 a chal­leng­ing year for oil pro­duc­ers and con­sumers ev­ery­where." As most of these prob­lems won't go away eas­ily or soon, they are, there­fore, the back­ground set­ting for the out­look Opec makes in the long term to 2035.

World eco­nomic growth fore­cast of 3.4 per cent is now lower by 1 per cent from last year's re­port while pop­u­la­tion is expected to in­crease to 8.6 bil­lion in 2035 from 6.9 bil­lion in 2010. Oil prices are as­sumed to stay above $100 a bar­rel and reach $120 in nom­i­nal terms by 2025 and $155 in 2035 re­flect­ing the cost of mar­ginal bar­rels, in­fla­tion, the ven­ture into high-cost re­gions and with cur­rent en­ergy poli­cies as they are.

Tak­ing the above as­sump­tions, Opec fore­casts world pri­mary ener- gy de­mand to in­crease by 54 per cent at the rate of 1.8 per cent a year or from 232.2 mil­lion bar­rel of oil equiv­a­lent a day (mboed) in 2010 to 359.2 in 2035. While oil de­mand for en­ergy is said to in­crease from 81 to 97.8mboed, it is sur­pris­ing that it may be over­taken by coal at 102.9 and also gas is ap­proach­ing fast at 94.8mboed. Need­less to say that oil de­mand for en­ergy use will be topped by non-en­ergy uses such as but not lim­ited to petro­chem­i­cals, as we shall see later.

Also sur­pris­ingly, Nu­clear en­ergy de­mand is said to in­crease from 14.3 to 21.6mboed in spite of wide­spread op­po­si­tion in many coun­tries. Opec be­lieves that the main op­po­si­tion is in some OECD coun­tries and those pro­grammes in China and In­dia may go ahead.Oil de­mand is fore­cast to grow from 87.8 mil­lion bar­rels a day (mbd) in 2011 to 107.3 in 2035 or 2.4mbd less than last year's fore­cast, re­flect­ing higher prices and tech­nol­ogy ad­vances in the trans­porta­tion sec­tor, the main con­sumer of oil.

Gone are the days when Opec and oth­ers fore­casted more than 120mbd even for the year 2020. Oil de­mand in the OECD re­gion will continue to slide from 46.3 to 41.1mbd in the pe­riod un­der con­sid­er­a­tion though this will be more than com­pen­sated by growth in the de­vel­op­ing coun­tries from 36.6 to 60.6mbd. Alarm­ing growth is fore­cast for Opec coun­tries from 8.3 to 12mbd which may bring some pol­icy re­sponse in some coun­tries to con­serve en­ergy and to pre­serve their ex­port mar­kets.

With oil re­serves in­creas­ing and other liq­uid streams in­creas­ing, Opec does not see any prob­lem in meet­ing the de­mand. Non-Opec sup­plies of oil and nat­u­ral gas liq­uids (NGL) are expected to in­crease from 52.4mbd in 2011 to 62.7mbd in 2035. The in­crease is mainly due to non-con­ven­tional oil (shale oil and oil sands) in North Amer­ica and pro­duc­tion in­creases in the de­vel­op­ing coun­tries and Eura­sia. As gas pro­duc­tion in­creases, NGLs fol­low suit as well. There­fore, what is left for Opec is an in­crease of oil sup­plies from 35.2mbd in 2011 to 44.9mbd in 2035. A warn­ing here is in or­der. Most of the Opec in­crease will be taken by NGLs and Opec crude oil pro­duc­tion is likely to in­crease from 29.8 to 34.9mbd only. Coun­tries which are in­vest­ing heav­ily to in­crease ca­pac­ity must be made aware of this un­wel­come re­sult and Opec in gen­eral must avoid the cre­ation of high sur­plus ca­pac­ity with its un­due pres­sure on oil prices.

With all the uncer­tain­ties in the world with re­spect to eco­nomic growth, en­ergy poli­cies and geostrate­gic developments, the above out­come can­not be as­sumed to be the one and only. There­fore, Opec says if the eco­nomic sit­u­a­tion wors­ens, de­mand in 2035 may fall to 98mbd and Opec crude call to 25.8 mbd. On the con­trary, if eco­nomic growth turns out to be higher, de­mand in 2035 may rise sub­stan­tially to 116.4mbd and the call on Opec to 43.7mbd. Then there is an­other case, which Opec calls "liq­uid sup­ply surge" where higher prices lead to higher nonOpec sup­ply and more shale oil and NGL pro­duc­tion in the US, the call on Opec crude in 2035 could fall to 25.9mbd. These ex­treme sit­u­a­tions may not hap­pen but coun­tries must be pru­dent and watch out for developments and move grad­u­ally. Ob­vi­ously, such even­tu­al­i­ties will so­licit ac­tion by Opec to main­tain price sta­bil­ity.

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