Prospects for World Oil Prices

1
Prospects for World Oil Prices

• Professor Paul Stevens
• Centre for Energy, Petroleum and Mineral Law and
  Policy
• University of Dundee
• Scotland
• MGIMO Moscow
• 7th October 2005

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Why are oil prices currently high?
IN 2004 DOLLARS THE PRICE IN 1980 AVERAGED 82.15
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Why are oil prices currently high?

• Unexpected demand increase
• driven by exceptional GDP growth
• plus constrained supply

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Unexpected demand increase driven by exceptional
GDP growth plus constrained supplyBUT it is not
all the fault of China!2004 Demand increased 2.5
million barrels/day 1.34 above the 1995-2003
trend (1.12) of which 56 was not in China
Source BP Statistical Review of world Energy 2005
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Unexpected demand increase driven by exceptional
GDP growth plus constrained supplyIn addition to
increased demand for wet barrels there is also an
increase in demand for paper barrels
-Speculation coming from concern about
geo-politics and Money Managers moving into
commodities -There is a real change in the
market attitude to the future of oil prices
reflected in the forward curve
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Change in the market attitude to futures prices.
Driven by .
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Unexpected demand increase plus constrained
supplySupply constrained by geo-politics,
Hurricanes (Ivan, Katrina and Rita) plus delays
to Non-Opec projectsAND there are refinery
constraints increasing the price of light sweet
crude 2002 Dubai-WTI differential 2.30. 2004
7.78. Q1 2005 8.56. REMEMBER light-sweet
crude provides the headline price WTI/Nymex and
Brent/IPE
Source BP Statistical Review of world Energy 2005
8
What about future prices?In the past high oil
prices resulted in

• Recession reduced demand
• Improved appliance efficiency and fuel switching
  which reduced the quantity demanded
• Increased the quantity supplied because of
  greater ability and willingness to invest by
  producers
• Thus less consumption plus greater supply
  oversupplied market and prices fall Markets
  work! But in the new world

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BUT IN THE NEW WORLD little sign of high prices
slowing demand growth i.e. demand will remain
above trendAre there grounds for concern? There
is complacency driven by the macro-economic
models!




-
-
MEAN AVERAGE CONSENSUS FORECAST OF EIGHT
ORGANIZATIONS HIGHEST - LOWEST
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BUT IN THE NEW WORLD little sign of high prices
reducing quantity demanded- Feasible fuel
switching already done- Money illusion plus
sales taxes?




-
-
MEAN AVERAGE CONSENSUS FORECAST OF EIGHT
ORGANIZATIONS HIGHEST - LOWEST
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BUT IN THE NEW WORLD there is concern that
supply is unlikely to respond




-
-
MEAN AVERAGE CONSENSUS FORECAST OF EIGHT
ORGANIZATIONS HIGHEST - LOWEST
12
Supply is not responding because of insufficient
investment

• International oil companies
• Returning money to the shareholders remember
  ideas of value based management are new only
  emerged in the 1990s.
• Managerially constrained because of downsizing.
• Service industry insufficient capacity because of
  monopsony and Ecommerce.

13
Supply is not responding because of insufficient
investment

• International oil companies
• Returning money to the shareholders remember
  ideas of value based management are new only
  emerged in the 1990s.
• Managerially constrained because of downsizing.
• Service industry insufficient capacity because of
  monopsony and Ecommerce.
• Problems in Russia?

14
Supply is not responding because of insufficient
investment

• International oil companies
• Returning money to the shareholders remember
  ideas of value based management are new only
  emerged in the 1990s.
• Managerially constrained because of downsizing.
• Service industry insufficient capacity because of
  monopsony and Ecommerce.
• Problems in Russia?
• National oil companies except Saudi Aramco
• Government budget constraints.
• Financial controllers have discovered theories of
  public choice plus principal-agent analysis.
• BUT what about China, India .?

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Conclusions

• System remains extremely vulnerable to a serious
  oil shock if another significant exporter is lost
  .

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Conclusions

• System remains extremely vulnerable to a serious
  oil shock if another significant exporter is lost
  .
• Investment upstream and downstream is unlikely to
  be sufficient even with higher prices because
• The new fiscal systems capture the majority above
  30 per barrel
• Why go back to the bad old days of excess
  capacity and poor profitability? Look at the
  minerals industry

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Conclusions

• System remains extremely vulnerable to a serious
  oil shock if another significant exporter is lost
  .
• Investment upstream and downstream is unlikely to
  be sufficient even with higher prices because
• The new fiscal systems capture the majority above
  30 per barrel
• Why go back to the bad old days of excess
  capacity and poor profitability? Look at the
  minerals industry
• Higher prices are here to stay for a long time.
  The issue is how high is high and how long is
  long? In the 1990s prices averaged 19 per
  barrel