Oil price spike carries threats

14 June 2012

With global economic turmoil worsening, oil prices are being dragged down at a time when governments are spending more

Despite what net oil-importing countries might think, most hydrocarbons producers do not like oil price spikes of any kind.

Such spikes always carry two threats. The first is that after a sharp increase the price always has a dramatic drop and the second is that large economies try even harder to diversify their energy mixes, so they use less oil.

Oil prices reached four-year highs in the first quarter of 2012 and this led to threats from Western economies that unless oil producers pumped more oil, they themselves would release emergency stocks into the market.

“Non-Opec oil supply is growing and will increase by 1 million barrels a day in 2012”

Saudi Arabia heeded the call and is set to produce an average of 9.6 million barrels a day (b/d) this year, which is about 6 per cent above its agreed Opec production ceiling. Over the course of the second quarter, this helped to bring the price down and it now sits at just under $100 a barrel, where it is hoped to stay, give or take $10, for the rest of the year.

Non-Opec supply is growing and will increase by 1 million b/d in 2012. This must be a worrying sign for Opec, but it is the result of having $100 a barrel oil. When prices are that high, a lot of oil that is expensive to produce becomes economically viable. Tight oil projects in the US and oil sands schemes in Canada are now starting to become feasible.

Riyadh believes $100 is a fair price to pay at a time when Iranian crude is being boycotted and other major producers, such as Libya and Iraq, are still trying to ramp up supply.

The problem is the global economy is still in turmoil more than three years after the financial crisis began. The news is getting bleaker rather than better, with eurozone countries falling back into recession, unemployment rising in the US and manufacturing slowing in China. These forces are pulling down oil prices at a time when governments are spending more. This darkens the outlook for the oil producers.

Oil volatility puts pressure on Gulf

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