Fresh reserves will calm prices

13 June 2008

Unfortunately for the IEA, simply bridging the potential oil supply gap is no guarantee that prices will fall, market sentiment is just as important. The International Energy Agency (IEA), which advises 27 of the world’s biggest oil consuming nations, faces a conundrum.

World oil demand is rising at its slowest pace in the past six years, mainly because of a series of fuel subsidy cuts in Asia which have hit consumption. Yet when it comes to supply, oil stocks in industrialised countries are at record lows, contributing to record oil prices.

The IEA, facing unprecedented pressure from its members to find a solution, is trying to ascertain the health of the world’s largest 400 oil fields. Its study is due in November.

Near the top of its priority list is Iraq. Baghdad claims its oil reserves are about 350 billion barrels, three times the level previously thought and more than Saudi Arabia’s 264 billion barrels.

Right now such numbers are pure conjecture, but the agency is right to argue that Iraq can play a big part in helping to bridge the short-term supply gap. Even if the potential reserves have been overstated, the country is still punching well below its weight.

Energy executives with access to Iraq’s oil fields are certain that it could produce far more. They claim that with the use of modern technology and the right resources, the country’s output could be strengthened by between 300,000 and 500,000 barrels-a-day (b/d) within the next 12 months - a 20 per cent increase on current levels.

Unfortunately for the IEA, simply bridging the potential supply gap is no guarantee that prices will fall. On several occasions over the past year Saudi Arabia increased production only to see prices rise further.

Market sentiment plays just as important a role as short-term supply. If the agency wants to decrease prices in the long term, it must hope its review of world oil fields comes up with soothing figures for agitated members.

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