How high can the price go for a barrel of oil?

26 August 2005
There has never been a better time to be in the oil industry, and the rewards for oil price bulls have been spectacular this year. At the end of the first week of August, West Texas Intermediate (WTI) was trading at about $67 a barrel. That is 50 per cent above its average level in August 2004 and far higher than the consensus forecast at the start of 2005.

Some experts have concluded that speculation, not fundamentals, is driving the trend. But they have been saying that for more than a year. It does not change the fact that oil prices are at record levels, US drivers are paying almost $2.50 for a gallon of gasoline, oil companies are effortlessly reporting massive profits and oil exporters have never had it so good. Saudi Arabia, the world's leading crude exporter, is likely to report a rise in total exports by more than one-third and a growth rate of at least 15 per cent in 2005.

All this has made oil at $100 a barrel, which seemed far-fetched when Goldman Sachs issued a report about market trends in April, increasingly likely, if not this year then perhaps the next or the one after.

The oil market defies human understanding. It is influenced by dozens of factors, including global politics, technology, the opportunism of spot traders and events that hit the headlines by the dozen on a daily basis. But it is difficult to avoid the conclusion that there has been a decisive shift in the psychology of world oil. For more than two decades, the energy industry has been haunted by the spectre of surplus oil. Now the fear is of a shortage. The emotion is reflected in the price.


The worries have been compounded by Matthew R Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which was published earlier this year. The book expands on the thesis articulated in 2004 that challenged the view that Saudi Arabia has enough oil to sustain present levels of production for up to a century.

The book is an excellent reference guide to the kingdom's principal oil fields, if nothing else. Its main point, however, has been vigorously challenged by Saudi Aramco. None of the world's leading international oil companies has so far suggested, publicly at least, that it is worth serious consideration. Nevertheless, the issue has got into the bloodstream of the energy market. Until the kingdom decisively rebuts his main points, it is likely the Simmons theory will exercise persistent upward pressure on oil prices.

The summer is ending with a hard-line oil minister being appointed in Iran and Venezuelan President Chavez suggesting that he could impose an embargo on petroleum exports to the US. These developments have not affected the balance of supply and demand. But they contribute to the growing feeling that, even at present levels, oil is more likely to go up than down. The probability of $100-a-barrel oil in the next 12 months is less than 5 per cent. But only the bold are asserting it will never happen.

A voice of moderation

In the past 12 months, the views of Sheikh Abdelmohsen al-Abikan, an adviser to the Saudi Arabian Justice Ministry, have been heard with increasing frequency. In statements broadcast on Saudi television and printed in the kingdom's newspapers, Al-Abikan has challenged the validity of claims that the Iraqi insurgency is a legitimate jihad, denounced unqualified Islamic scholars that have issued fatwas calling for war against US-backed security forces in Iraq and attacked the ideology of Al-Qaeda. He has also gone on the record calling for a dialogue with non-Muslims.

The rise of Al-Abikan is striking evidence that there is more variety in Muslim opinion in the Middle East in general and Saudi Arabia in particular than is regularly suggested in reporting of the region. It is also a sign that the Saudi government is trying to play its part

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