Tuesday, March 10, 2009
Is cheap oil the answer?
Tuesday, 10 March 2009
Cheap oil could be the basis for the revival of world economy as the world would get a $1 trillion economic stimulus if oil prices stay at around $40 a barrel through 2009, the head of the International Energy Agency told last week. According to IEA Executive Director Nobuo, lower fuel bills were now supporting an ailing world economy, and Tanaka urged the club of oil exporters to be cautious before cutting oil supplies at a meeting on March 15. Oil prices have fallen from a record high of nearly $150 a barrel struck last July and have since mid-December traded in a narrow band near $40, caught between slumping demand and the possibility of further OPEC output cuts. "Watch carefully the market and make proper decisions," Tanaka urged OPEC, speaking on the sidelines of a London conference hosted by research group New Energy Finance.
But can the world trust the oil revenues thirsty oil producers in a tough economic situation? Is OPEC capable and willing to support this effort in a period of shrinking oil revenues?
The answer cannot be clear, but the question is “whether OPEC capable to influence, or control the oil prices? Are the cartel members capable of support falling oil prices through the cuts of daily production? With the current foundamentals the answer is negative for both questions. But as the market’s psychology is this time very sensitive, nothing can be eliminated.
OPEC’s first reaction to Mr. Nobuo comments was neutral, but clear about oil producers future intentions. “We all want to see the global economy back on its feet as quickly as possible. The moderation of prices since last summer’s extreme certainly offers some short-term relief to consumers. However, if the current low price environment persists, this short-term relief may not translate into long-term gain. We need to remember that the short-, medium-, and long-term timeframes are all interlinked. Oil prices need to be at levels to help sustain economic growth, by supporting longer-term energy industry investments across the board. Each energy source, each technology, and each project, has a price when it is viable; and a price when it is not. Low oil prices inevitably mean less investment” said Abdalla Salem El-Badri, OPEC secretary general.
At the same time, mr. Badri underlines that “a failure by the industry to invest will result in a supply crunch by 2013 and beyond. However, it is also important to recognize that the IEA’s comments are confusing and misleading. Whilst asking for prices to remain at $40, it also wants investments to be made that are not economically viable at these prices. This is widely acknowledged by the industry at large. It is a short-sighted view. OPEC remains committed to ensuring a stable, sound and sustainable oil industry, and upholding its investment plans when it makes business sense”.
The IEA also has asked OPEC to “watch carefully the market and make proper decisions” before cutting supply. According to cartel’s Secretary General “OPEC always makes informed decisions. They are taken following careful analysis of all the various inputs, and in the interest of market stability. And this will be the case when OPEC meets again on March 15. It should also be noted that the IEA’s own demand forecasts have been continually revised down in recent months”.
After all these is more than clear that oil producers and IEA disagree to the basics and especially the desired level of oil prices. In a formal conversation OPEC members will agree that low oil prices will be the proper tool to encounter economic recession, and the other day they will try what they can to support oil prices. The good news for consumers are that OPEC looks uncapable for the moment to lift oil prices…
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