Oil Prices Likely to Dip

February 21, 2007
By Brian Fallow
New Zealand Herald

http://www.nzherald.co.nz/category/story.cfm?c_id=37&objectid=10424966

World oil prices will continue to fall, BP's chief economist Peter Davies believes, but probably not back to the levels prevailing earlier in the decade.

"We expect prices to stay over US$40 a barrel for the next three or four years at least," said Davies, in Wellington for an international energy economists conference.

He readily acknowledges that like his peers he failed to predict the jump in the oil price between 2004 and 2006 when it rose from around US$27 to a peak of US$78 last August. It was US$58 yesterday.

The downward influences on prices had the upper hand at the moment, he said, but only up to a point.

One was global spare capacity - the extent to which producers can quickly ramp up production.
It had become very tight in 2004, triggering the price rise, Davies said. "But spare capacity is rising again, because markets work."

Inventories were also high.

Then there was the impact of higher prices in dampening demand and encouraging an increase in supply.

The offsetting upward influences on oil prices included Opec's policies. Its two moves in recent months to cut back production had underpinned prices, Davies said.

There was also an ongoing trend of higher production costs and taxes.

And geopolitical concerns were a perpetual factor.

In Iraq no international oil company was operating despite its great potential, Davies said. "Even if there was security it would take two years at least to increase production significantly."

Tensions between Iran and the US were not diminishing and the possibility of disruption to Iranian supplies was seen as a risk in the market.

Tensions in the Niger delta continued and in Venezuela the industry was effectively being nationalised.

"All this does not look particularly good," Davies said. "But it is not much worse than we have seen before."

On the demand side China was an important but not dominant factor.

It accounted for just over a third of the growth in world oil demand between 2000 and 2005.
But over the past 10 years the increase in Chinese and Indian consumption combined had been matched by the increase in Russian production.

Despite concerns about "peak oil", global proven oil reserves continued to rise, Davies said. That is, the amount of oil that could be produced with today's technology and economics was increasing faster than it was being depleted.

At 1.2 trillion barrels it represented about 40 years' supply at today's rate of consumption.
"Energy policy should not be based on expectations that oil will run out," he said. Nor should it be based on concerns that falling production within OECD producers such as the United States, Britain, Norway and Australia implied increasing reliance on the Middle East.

"The share of world reserves represented by the Middle East has not been going up," he said. "But we are becoming more reliant on Russia, and we are seeing in non-OECD countries a tendency towards resource nationalism."

As for biofuels, BP has committed to investing $500 million, concentrating not on producing ethanol from corn - which people or livestock can eat - but from cellulosic sources like agricutural wastes or switch grass grown on marginal land.

"We could easily get 1 million barrels a day by 2020 globally," he said.

But that is less than one year's growth in demand for oil.