OPEC Foresees Gap for Upstream Investment by 2020

OPEC in its world oil outlook shows that as early as 2020 demand for OPEC crude could be as low as 29 million bpd or as high as 37 million bpd. According to the oil cartel, this outlook translates into an uncertainty gap for upstream investments in OPEC member countries of over US$250 billion. "There is, therefore, the very real possibility of wasting financial resources on unneeded capacity," said OPEC secretary general, Abdalla Salem El-Badri.

This revelation comes as the oil cartel in its mid-year 2010 report says that there is an air of cautious optimism about the oil market outlook. "The robustness of the market during the third and fourth quarters is by no means guaranteed and the situation is finely balanced," said OPEC. With this kind of pronouncement, economic watchers believe that Nigeria as an OPEC member country needs to embark on policy shifts that will drive other sectors of the economy which is currently dependent on oil revenue. OPEC believes that the daunting uncertainties stem in part from consuming countries announcing policies that are geared towards reducing oil demand, subsidizing alternatives and putting heavy tax burdens on the use of oil. "Inconsistent, unrealistic and wishful-thinking policy announcements can only provide the wrong signals to markets and investors, creating a lack of certainty and predictability that undermines the ability of the oil industry to invest to meet future energy demand," said El-Badri.

The price of OPEC basket of twelve crudes stood at US$74.19 a barrel last week Thursday, compared with US$73.26 the preceding day. The new OPEC Reference Basket of Crudes (ORB) is made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).

According to OPEC without the confidence that there will be additional demand for oil, there may be no incentives to invest. "And if investments are not made in a timely manner, then future consumer needs might not be met. The global economic recovery is proceeding at a satisfactory pace, in particular in developing countries. Oil demand is growing again, albeit at an expected modest rate of 900,000 bpd for 2010. And prices are at a reasonable level that is satisfactory to both producers and consumers. However, the risks remain high. They relate to the high levels of public debt in some Organisation of Economic Cooperation and Development (OECD) countries; the unsustainable rates of unemployment in many places; credit tightness and the still fragile financial system; the shaky recovery in private demand that is not yet sufficient to fully support economic expansion; and the associated government support exit strategies. We therefore need to remain vigilant and avoid complacency," OPEC said.

Not a few oil market watchers can be fair to say that indeed, oil markets have over the past few years been characterised by excessive volatility and large price swings. Many recognise that the emergence of oil as a financial asset traded through a diversity of instruments in futures exchanges and over-the-counter markets may have helped fuel excessive speculation to drive price movements and stir up volatility. It led to a situation where futures prices were, to a certain extent, detached from the supply and demand fundamentals of the underlying commodity.

The changes that the energy scene has witnessed over the last few years have been dramatic. They stem from two main causes: the global financial crisis, and the subsequent economic downturn, and the inefficient functioning of oil markets in terms of price discovery. The years 2008 and 2009 were the first time since 1981 that global oil demand declined in two successive years. The cumulative impact was a fall of 1.8 million bpd. The price of a barrel of crude lost almost US$100 dollars in less than six months from mid-2008. The demand for OPEC crude fell sharply and the resulting supply adjustment by OPEC member countries led to a significant increase in unused production capacity. Today, this figure is 6 million bpd. - Business Day