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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 Why are oil prices currently high? MONTHLY OIL PRICES - OPEC BASKET 1983- 2005 (AFTER JUNE 2005 BRENT) 70 US$ per barrel 60 50 40 30 20 IN 2004 DOLLARS THE PRICE IN 1980 AVERAGED $82.15 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 0 1983 10 Why are oil prices currently high? Unexpected demand increase driven by exceptional GDP growth plus constrained supply Unexpected demand increase driven by exceptional GDP growth plus constrained supply BUT 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 ANNUAL GROWTH IN WORLD OIL DEMAND 3000 THOUSAND B/D 2500 2000 1500 1000 500 0 1995 -500 1996 1997 1998 1999 CHINA 2000 USA 2001 REST Source: BP Statistical Review of world Energy 2005 2002 2003 2004 Unexpected demand increase driven by exceptional GDP growth plus constrained supply In 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 Change in the market attitude to futures prices. Driven by …. WTI FORWARD CURVE ON NYMEX 70 $ PER BARREL 60 Aug-05 50 Mar-05 40 SUMMER 2004 30 ONE YEAR AGO 20 THREE YEARS AGO 10 0 1 2 3 4 5 YEARS AHEAD 6 7 Unexpected demand increase plus constrained supply Supply constrained by geo-politics, Hurricanes (Ivan, Katrina and Rita) plus delays to Non-Opec projects AND 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 NON-OPEC PRODUCTION GROWTH 1997-2004 1600 1400 1200 1000 800 600 400 200 0 -2001997 1998 1999 2000 2001 -400 NON-OPEC FSU Source: BP Statistical Review of world Energy 2005 2002 2003 2004 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 BUT IN THE NEW WORLD: little sign of high prices slowing demand growth i.e. demand will remain above trend Are there grounds for concern? There is complacency driven by the macro-economic models! ANNUAL GROWTH IN WORLD OIL DEMAND 3000 2500 THOUSAND B/D + + 2000 *- 1500 * - 1000 500 0 1995 -500 1996 1997 1998 1999 2000 CHINA * 2001 USA 2002 2003 2004 2005 REST MEAN AVERAGE CONSENSUS FORECAST OF EIGHT ORGANIZATIONS: + HIGHEST - LOWEST 2006 BUT IN THE NEW WORLD: little sign of high prices reducing quantity demanded - Feasible fuel switching already done - Money illusion plus sales taxes? ANNUAL GROWTH IN WORLD OIL DEMAND 3000 2500 THOUSAND B/D + + 2000 *- 1500 * - 1000 500 0 1995 -500 1996 1997 1998 1999 2000 CHINA * 2001 USA 2002 2003 2004 2005 REST MEAN AVERAGE CONSENSUS FORECAST OF EIGHT ORGANIZATIONS: + HIGHEST - LOWEST 2006 BUT IN THE NEW WORLD: there is concern that supply is unlikely to respond NON-OPEC PRODUCTION GROWTH 1997-2004 + 1600 1400 1200 1000 + 800 *- 600 * - 400 200 0 -2001997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -400 NON-OPEC FSU * MEAN AVERAGE CONSENSUS FORECAST OF EIGHT ORGANIZATIONS: + HIGHEST - LOWEST 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 1990’s. – Managerially constrained because of “downsizing”. – Service industry insufficient capacity because of monopsony and Ecommerce. 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 1990’s. – Managerially constrained because of “downsizing”. – Service industry insufficient capacity because of monopsony and Ecommerce. • Problems in Russia? 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 1990’s. – 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 ….? Conclusions • System remains extremely vulnerable to a serious oil shock if another significant exporter is lost …. 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 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 1990’s prices averaged $19 per barrel …