The Current Surge in Global crude Oil Prices puts forth two basic Questions – what are The Underlying causes and what’s The Worst we can expect. While The Most Pessimistic Projections may prove untrue, The World is Indeed staring in The Face of another crude shock that could derail Global Recovery
In a communiqué to B&E, credit rating firm Crisil states, “In a year when the world expects its dependence on OPEC oil supply to increase, concerns over a wider disruption of supplies from OPEC countries will fuel further oil price increase.” The dependence on OPEC stems from the fact that global oil consumption will grow by an annual average of 1.5 million barrels per day through 2012, while the growth in supply from non-OPEC countries averages less than 0.1 million barrels per day each year. At this juncture, it is important to understand the fact that in the present scenario, OPEC does have substantial spare productive capacity (approximately 5.2 million barrels per day – Saudi Arabia’s contribution being pegged at 3.2 million barrels per day), which can be used to replace reduced output in Libya or any other country in the midst of the uprising. The only viable reason for the surge in crude oil price is purely based on perception that the political upheaval could eventually spread to major oil producing countries including Saudi Arabia (in fact, a Wiki Leaks covered in The Guardian recently claimed that even Saudi reserves are overestimated). Indeed, that is not entirely a remote possibility, considering that there is a simmering discontent with the monarchy there as well.
Rachel Ziemba, an analyst with Roubini Global Economics, gives another reason why the risks to price seem to be tilted to the upside in the near term. Rachel put the onus on the fact that oil companies are putting on hold their current operations and explorations in Libya, “fearing political risks, and sabotage of energy infrastructure.” Further escalation would probably lead to decades of underinvestment, which eventually will increase future supply risks. It is worth pondering over the fact that unlike in 2008, when the spike in oil prices was primarily because of booming demand and speculative frenzy, the $150+ oil price today stems from a potentially major supply shock. Analysts like Kent Moors of Money Morning feel that the Middle East crisis represents an unsettling reality and the recent oil price march is just the beginning.
But is the new magic figure going to be $220 per barrel? Although it is not clear as to how long the impasse will continue, global oil reserves and actions taken up by OPEC members have ensured that prices come down. The estimates of prices reaching $220 a barrel or more are purely based on a simplistic assumption that both Libya and Algeria would halt their production – which is an unlikely scenario so far. Yet, even this dose of optimism doesn’t discount the importance of bringing stability to the MENA region. Thanks to its underground resources, the region is just too critical to be left to fend for itself.
Rachel Ziemba, an analyst with Roubini Global Economics, gives another reason why the risks to price seem to be tilted to the upside in the near term. Rachel put the onus on the fact that oil companies are putting on hold their current operations and explorations in Libya, “fearing political risks, and sabotage of energy infrastructure.” Further escalation would probably lead to decades of underinvestment, which eventually will increase future supply risks. It is worth pondering over the fact that unlike in 2008, when the spike in oil prices was primarily because of booming demand and speculative frenzy, the $150+ oil price today stems from a potentially major supply shock. Analysts like Kent Moors of Money Morning feel that the Middle East crisis represents an unsettling reality and the recent oil price march is just the beginning.
But is the new magic figure going to be $220 per barrel? Although it is not clear as to how long the impasse will continue, global oil reserves and actions taken up by OPEC members have ensured that prices come down. The estimates of prices reaching $220 a barrel or more are purely based on a simplistic assumption that both Libya and Algeria would halt their production – which is an unlikely scenario so far. Yet, even this dose of optimism doesn’t discount the importance of bringing stability to the MENA region. Thanks to its underground resources, the region is just too critical to be left to fend for itself.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
