Business | Oil & Gas
Global economic expansion hinges on oil
August 1 marked a significant date in the history of oil prices. It was on that day that sweet crude oil futures for September delivery traded at a record $78.77 a barrel in New York.
- Dr Jasim Ali, Special to Gulf News
- Published: 23:04 August 11, 2007
August 1 marked a significant date in the history of oil prices. It was on that day that sweet crude oil futures for September delivery traded at a record $78.77 a barrel in New York.
The sudden development was attributed to news that US oil reserves declined by some 6.5 million barrels, from 351 million to 344.5 million. However, oil prices dropped off several dollars per barrel in the next few days following emergence of reports denying a material threat to American stock. Yet, prices again increased on August 9, but this time in Asia, based on reports of a decline in US refinery activity as well as crude and gasoline stockpiles.
At any rate, the developments showed the markets are nervous about oil. Adding to this dilemma is adverse speculation about the outcome of the Organisation of the Petroleum Exporting Countries (Opec) meeting scheduled to be held on September 11 in Vienna. Opec is headquartered in the Austrian capital. Press reports suggest that oil ministers of the Opec do not intend to increase production during the 145th meeting.
Extra capacity
It is feared the world will suffer from a case of absence of spare capacity to meet growing demand. Extra capacity is vital to meet mounting demand on the back of an ever growing global economic expansion. For example, China's gross domestic product (GDP) grew by more than 10 per cent in 2006. China is the second largest consumer of petroleum products after the US.
A publication by Opec puts current global demand at 83 million barrels per day. However, it predicts a jump to 118 million barrels by 2030 on the back of firm global economic expansion notably in major importing countries.
China, the second largest importer of crude oil after the US, reported more than 10 per cent growth in its gross domestic product (GDP) in 2006. Chinese firms are engaged in oil exploration in numerous places including Sudan partly to help ensure supply against growing demand.
In addition to economic reasons, political causes help keep oil prices firm. These include tensions in the Middle East (home to the primary source of crude production and reserves). Reference is made to repeated attacks on petroleum infrastructure in Iraq. Another source of tension is ambiguity surrounding the Iranian nuclear programme.
Still, there are problems in other oil-producing countries such as Nigeria where oil pipelines come under repeated attacks. Another source of instability relates to repeated threats issued by Venezuela with regard to cutting oil supply to the US, the world's largest consumer of petroleum products.
Clearly, numerous economic and political issues influence prices of oil in international markets. Still, psychological factors, notably rumours, only add to uncertainties surrounding oil prices.
At any rate, the rise and decline of oil prices mean a great deal for the Gulf Cooperation Council (GCC) countries. According to an Opec publication, Saudi Arabia earned a sum of $194 billion from exporting petroleum products in 2006. The amount represents a growth of 20 per cent compared to 2005.
Guaranteeing availability
It is estimated that GCC states hold about 500 billion barrels, therefore accounting for 41 per cent of proven oil reserves in the world. Saudi Arabia alone sits on nearly a quarter of the world's crude oil reserves.
Undoubtedly, petroleum products such as petrol, diesel and jet fuel are vital for the viability of modern existence. Fortunately, there is abundant oil supply. It is estimated that at current production level, GCC states could supply oil for the next 200 years. However, billions of dollars must be invested to guarantee availability of sustained capacity.
The writer is a Member of Parliament in Bahrain.
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