Iraq expansion and IEA call may stifle oil prices

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Oil prices could be stifled in the long term by massive expansions in Iraq's hydrocarbon output capacity and the latest call by International Energy Agency (IEA) to cut crude consumption, an energy centre said yesterday.

The London-based Centre for Global Energy Studies (CGES), run by former Saudi oil minister Ahmed Zaki Al Yamani, described the IEA's call for energy investments of more than $10 trillion (Dh36.7trn) as "frightening".

In its weekly report sent to Emirates Business, CGES said such developments would create confusion in the oil market despite signs of global recovery.

It noted that with the passage of every week, evidence seems to be building that the world economy is now in the recovery room.

It cited a growth of more than three per cent in the US gross domestic product in the third quarter of 2009 over the previous quarter and a 16 per cent surge in the Baltic Dry Index also suggests that world trade is picking itself slowly off the floor.

"However, despite such welcome tidings, the oil industry faces more confusion and uncertainty with the appearance in the news last week of two oil-related items having very different longer-term implications," said the report. "On the one hand, there was the publication of the IEA's 2009 World Economic Outlook, which frightened everyone with its call for more than $10trn of additional investments in energy infrastructure and energy-related capital stock to avert catastrophic climate change... on the other hand, there was news that Iraq had agreed with a consortium led by ENI to expand output at its Zubair oilfield."

According to the report, new capacity from this giant oilfield, when added to additional production from other massive Iraqi fields, means that in seven to 10 years Iraq will be able to produce at least eight million barrels per day, placing it among the world's largest oil producers, second only to Saudi Arabia in Opec.

"We have in these two items the kernel of a severe problem that will surely increase by many notches the existing stresses and strains in the oil business. The IEA argues that business will generate oil demand growth of one per cent annually to 2030 amid an overall rise in hydrocarbons consumption that will lead to seriously high levels of CO2 and occasion catastrophic climate change. To prevent this will require the emasculation of fossil fuel use, hence their advocacy of the 450 (parts per million of CO2) scenario, according to which oil use will need to be curtailed by almost 17 mbpd over the next 20 years," said the report.

"Something will have to give when a required massive cut in global oil consumption is juxtaposed with huge planned increases in Iraqi oil capacity, and boosts elsewhere too.

"Very high prices could slash oil use, but they are likely to be obtained by tax increases at the consumer end, leaving producers in the Middle East with a lot of low-cost capacity on their hands. Under these conditions it is difficult to see how the price of crude oil could stay on a rising trajectory in the years ahead, as the futures market seems to think it will."

The report noted that after a promising start this year, when US refining margins exceeded last year's by a healthy amount, they have performed badly in comparison with 2008 and very poorly compared with 2007.

"In 2007 crude oil prices were rising strongly... however, product prices were outpacing crude because of strong growth in the US economy, which allowed refiners to more than claw back higher input costs.

"Last year, margins were reasonable in the first half but weaker in the second, apart from a brief hurricane-induced interlude of extremely high spreads, because the US was hit hard by the financial crisis from August onwards.

"Margins since mid-March 2009 have been consistently low, especially after mid-September, largely due to surges in crude oil prices that refiners have found difficult to pass on to financially strapped customers in a recession," said the report.

By Nadim Kawach

© Emirates Business 24/7 2009