Keep that oil gushing

Rising world oil consumption next year is expected to deliver another increase in demand for Opec crude supplies, the cartel's Vienna secretariat said in a report early last week, in its first forecast for 2005. The organisation sees demand for its crude going up 340,000 barrels per day to an average 27.36 million bpd, from 27.02 million bpd in 2004, following an increase of 590,000 bpd this year.

The projection may help underpin the view that Opec should be able to sustain a bull run on world oil prices into a sixth year following the price crash of late 1998 and early 1999. Oil prices in Europe now are back above $41 despite Opec's efforts to calm markets by opening up the pumps. Traders worry that with production from the cartel now close to full capacity there is little spare to cover disruptions.

World oil demand in 2005 is projected to climb 1.66 million bpd to 82.56 million bpd, up two per cent, after unusually sharp growth of 2.1 million bpd, 2.7 per cent this year, the report said. The 2005 demand growth estimate is a little lower than the 1.82 million bpd projected by the International Energy Agency, the Paris-based group that advises industrialised energy-consuming nations.

Opec's forecast for the call on its crude is very close to the IEA's projection of 27.4 million bpd. Both are well below Opec's latest estimate for its own output of 28.92 million bpd for June, when it said production rose 700,000 bpd from May.

That could lead Opec to consider cutting back production at some point to prevent world oil inventories rising too far. Late last year and earlier in 2004 Opec cut production because it feared sharp inventory builds. But demand forecasts proved too low and the output cuts helped spur prices to record highs of over $42, compared to Opec's official target price for its benchmark blend of crudes of $22-$28 per barrel.

Opec says it is committed to keeping crude prices from rising further and its members are investing to boost their production capacity to help stabilise a turbulent oil market. The organisation's members are already pumping two million barrels a day above their output target of 25.5 million barrels. The group has asked major non-Opec producers such as Russia to increase their output capabilities in tandem with Opec, but has so far received no assurances that they would do so, says secretary general Purnomo Yusgiantoro, who is also Indonesia's minister of energy and mineral resources. But many feel they don't have much spare capacity.

A robust demand for oil imports from China, geopolitical tensions and refining bottlenecks in major importing countries have fanned fears about possible crude shortages. To help calm a nervous and sensitive market, Opec members are investing in their oil fields and facilities. Opec's director of research Adnan Shihab-Eldin says that members will add between one million and 1.5 million barrels to their current spare capacity by the end of next year, for a new aggregate surplus of between 2.5 million and 3.5 million barrels of daily production capacity by the end of 2005. This new surplus would equal at least 10 per cent of Opec's current production ceiling.

Barclays Capital anticipates that crude prices will average $40 a barrel in the fourth quarter. Its chief analyst says he isn't likely to change that forecast as a result of Mr Purnomo's comments but expresses concern that even a modest supply shock could trigger "explosive prices moves".

The high oil prices must obviously be feeding into higher costs for business in Malta. Last year, the country imported Lm101.9 million worth of fuel and lubricants while, during the first quarter of this year, the value of imports was up by 9.8 per cent, no doubt adversely affected by the higher prices in the market. It is indeed strange, if not a case of gross mismanagement, that Enemalta does not appear to have a risk management policy in place. Its annual report speaks of "significant exposure" to foreign exchange and interest rate risks relating to its foreign borrowings of $130 million, yet it does not hedge such risks. Similarly, it admits to "significant exposure to fluctuations in prices of petroleum products" but does not hedge its fuel prices.

Of course, oil produced the modern world - its ways of work, warfare and recreation - and soon, we are told, the end of cheap oil will produce abrupt, wrenching changes in the way we live. Changes, certainly, but not convulsions, because the modern world responds to price signals.

That is why US energy efficiency - energy consumed to produce a dollar of GDP - has roughly doubled since the oil shocks of the 1970s. America's less than five per cent of the world population consumes more than 20 per cent of all oil. Surging demand by India and, especially, China will cause prices to rise. And terrorists, or chaos in Venezuela or Nigeria could cause prices to soar.

In 1977, President Jimmy Carter said we "could use up all the proven reserves of oil in the entire world by the end of the next decade''. But today known reserves are larger than ever. Reserves and production outside the Middle East are larger than they were 31 years ago, when a State Department report was titled The Oil Crisis: This Time the Wolf Is Here.

M. A. Adelman of MIT notes that in 1971 non-Opec countries had about 200 billion barrels of proven reserves. In the next 33 years they produced 460 billion "and now have 209 billion 'remaining'." Note Mr Adelman's quotation marks. To predict actual reserves would require predicting future exploration and development technologies.

However, the rate of discovery has been declining for several decades. Of course, oil supplies are, as some people say with a sense of profound discovery, "finite''. But that distinguishes oil not at all from land, water or pistachio nuts.

Russell Roberts, an economist, says: Imagine that you love pistachio nuts and are given a room filled five feet deep with them. But you must eat them in the room and must leave the shells. When will you have eaten them all? Never. Because as it becomes increasingly difficult to find nuts amid the shells, the cost of the nuts, in time and effort, will become too high. You will seek a substitute - pistachios from a store, or another snack.

Oil over $40 a barrel accelerates exploration for new fields, and development of known but technologically inaccessible fields, including some fields four miles below the surface of the Gulf of Mexico, where there may be at least 25 billion barrels. High prices may also prompt development of hitherto economically unfeasible sources, such as US oil shale and Canadian tar sands. Tim Appenzeller, writing in National Geographic, says tar sand deposits in Alberta "hold the equivalent of more than 1.6 trillion barrels of oil - an amount that may exceed the world's remaining reserves of ordinary crude''. Alberta, a future Saudi Arabia? Perhaps. Full-throttle production of oil from tar sand is not economical. So far.