Unsolved equation: oil prices vs. economic recovery

Since the oil price hike in summer 2008, the oil prices have been witnessing dramatic decreases worldwide. However, this year, in the shadow of ongoing unrests in the Middle East and Africa region, oil prices have been escalating once more. This price increase is ringing the alert bell; would $100 per barrel harm the economic recovery?

Financial markets and the Organization of Petroleum Exporting Countries (OPEC) are repeating their 2008 mistake in assuming the world can live with $100/bbl oil. There is food price inflation in emerging countries, and when fuel inflation is added, domestic unrest develops.

Paul Horsnell at Barclays Capital in London expects oil prices to be a political issue in 2011, particularly in the UK where retail prices are at new highs due to increased taxes. The weak dollar, a civil war in oil-producing Libya, political tension throughout the Middle East and the earthquake in Japan all contributed to the steady increases in recent months.

Threats to oil production have increased the odds that gasoline will cost $4 per gallon during the summer season (the period between April 1 and September 30) and heavier travel months . The U.S. Energy Information Administration put a 25% probability on the national monthly average retail price for regular gasoline exceeding $4 a gallon during summer.

Crude oil prices have been rising, but will hit $120 a barrel are still below the $148 per barrel that coincided with the record fuel prices in the middle of 2008 . the record of $4.07 per gallon was set in July 2008 . With the strife in Libya unlikely to end any time soon, and a pretty weak but sill upward economic recovery, you shouldn’t expect any relief in summer gasoline prices . At some point, the price of fuel would drive up the costs of consumer goods and become a drag on the economy.

Total boss Christophe de Margerie told Reuters ahead of an energy conference in Abu Dhabi that the global economy was just recovering. “It would have been better for the prices not to go too high too quickly,” he said.

The market is bullish because there is increasing demand in emerging markets … it (demand) is higher than expected. Brent crude rose above $120 a barrel in New York, meanwhile, US crude oil for May delivery rose to settle at $ 123.45 / barrel, while Asia crude oil delivery for May rose to settle at $ 106.18 / barrel. A Reuters poll showed that US crude oil is expected to hit $100 a barrel in the first quarter, but a new record high above $147 is far less likely.

Based on projections from the EIA May 2010 report, members of OPEC could earn $818 billion of net oil export revenues in 2011, but this figure will definitely rise to reach $1063 billion as a result of current events in Libya which is not clear when to end. In 2009, OPEC earned $571 billion in net oil export revenues, a 41 % decrease from 2008. Saudi Arabia earned the largest share of these earnings, $153 billion, representing 27 % of total OPEC revenues.

Oil Supply in Middle East and Africa
Non-OPEC Middle East & Africa crude oil and NGLs production over the medium-term is expected to stay approximately flat, at just over 4.2 million barrels per day.
In the Middle East region, Oman will depend on heavy oil developments and enhanced oil recovery projects to offset decline rates and sustain a production level of around 0.8 million b/d. In this regard, good results have already been achieved at the Mukhanizana field using steam injection. Production at this field is expected to increase from 90,000 b/d in 2009 to around 150,000 b/d by 2012. In addition, Oman will add 10,000 b/d from the Marmul polymer injection project , 40,000 b/d from miscible gas injection at the Harweel field and another 40,000 b/d from steam injection at Qarn Alam field.

On the other hand, production from Yemen and Syria is expected to decline slowly over the medium-term. For Syria, increasing water production becomes an ever more serious problem in mature and depleting fields. Crude oil and NGLs production in the non-OPEC Middle East is expected to fall slightly from 1.7 mb/d in 2009 to 1.5 mb/d in 2014.

In Non-OPEC Africa, some growth is expected, mainly from Sudan and Congo. In recent years, considerable growth has occurred in Sudan, although this has not been as quick as anticipated just a few years ago. Looking ahead, the start-up of the Gumry and Meleta fields is set to add around 100,000 b/d of capacity by 2012.

Consequently, Sudan’s crude oil and NGLs production was expected to increase from about 470,000 b/d in 2009 to 540,000 b/d in 2014. Production from Congo is expected to increase over the medium-term, mainly due to increased investments in a new onshore development and the ramp-up in production from deep water projects, including the M’Boundi Upgrade, Moho /Bilondo, Haute Mer N’Kossa and Azurite. As a result, Congo’s crude oil and NGLs production is anticipated to increase from about 270,000 b/d in 2009 to 340,000 b/d in 2014. Other countries contributing to the medium-term growth include Ghana, driven by the Jubilee phase 1 (120,000 b/d) development, which started to produce 55,000 bbl/d at 15th December, 2010, with output set to rise to 120,000 b/d over the next six months as more wells come into production.

On the other hand, Egypt is projected to decline steadily from almost 700,000 b/d in 2009 to less than 600,000 b/d in 2014. This is driven by a production decline in the Gulf of Suez, which accounts for the majority of Egypt’s oil production. However, the rate of decline is expected to be limited by the emergence of the Western Desert as a new oil-producing region and by growing condensate production. Crude oil and NGLs production in non-OPEC Africa remains fairly flat between 2009 and 2014 at around 2.6 mb/d.

Prepared by Mostafa Mabrouk, Vice Chairman Assistant For Economic Affairs, Ganope


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