Introducing the latest annual BP Statistical Review of World Energyin London on 14 June, BP Chief Economist Peter Davies said that tight oil production and refining capacity had taken the market into unknown territory. As David Knott reports, Mr Davies sees no early easing of crude prices, with normal market forces taking a long time to have any impact.
World energy markets are passing through a complex period, according to Prof Davies, with 2004 proving to be a year when all energy sectors were demand driven, showing strong consumption growth across the board. “The combination of fast growth in both Chinaand the rest of the world proved to be exceptional,” he said. “Demand strength was generated by fast economic growth worldwide, and impacted all primary fuels and all regions of the world.”
While growth was rapid, supplies of the world’s tradable fuels were maintained, although there were price rises in particular for traded coal and oil, and to a lesser extent gas: “World energy markets are now in a new place: a starting point of tight capacity. 2005 is tending to show a slight slowing – of economic growth and of oil consumption growth, but not with any easing of oil prices. The underlying structures of energy markets have not changed. However, market forces will probably take a long time to work through fully.”
Oil prices rose early in 2005, with Brent crude reaching $55/B in mid-March and early April before easing back to around $50/B of late. Prof Davies saw no single factor behind the price rise, although there had been a build-up and coming together of mutually reinforcing factors: “The surge in oil consumption in 2004 has had the effect of bringing almost all of the world’s available oil capacity into production. There has always been enough oil in aggregate to meet demand, but most estimates now place spare production capacity at only around 1-1.5mn b/d. This provides little flexibility in the event of another increase in the need for oil – either as a result of strong demand or a possible supply disruption.”
Markets naturally drive prices up in such a situation, Prof Davies continued: “Furthermore, it has become widely appreciated that a renewed build-up of significant additional excess capacity will take time, even though there is no shortage of potentially producible oil resources. This has also been reflected in the rise at the back end of the forward price curve. As of today the forward price for oil to be delivered in 2010 is the same as for immediate delivery. This is unusual in a period of high prices.” Among factors reinforcing these pressures he cited OPEC’s raised price objectives, supply disruptions including last year’s Hurricane Ivan, growing commodity investment by funds, and geopolitical concerns.
Consumption Growth
Last year was characterized by very strong energy consumption growth: world primary energy consumption grew by 4.3%, the highest level since 1984 and double the 10-year average rate in percentage terms; and in volume terms 2004 saw the largest ever single increment in world primary energy consumption. China was a critical element, representing 13.6% of world energy consumption and growing by 15.1% (43% of energy consumption growth) in 2004. Yet this was actually a slowdown in Chinese energy demand growth, from 16.4% in 2003 and 23.5% in 2002.
During 2002-04 China’s energy consumption grew at twice the rate of its GDP, and oil has increasingly replaced coal in power generation. Prof Davies explained: “At the same time the use of oil in transportation has grown rapidly. Vehicle sales rose 9% last year after growing by 31% in 2003. As a result gasoline consumption grew by 22% – nearly 200,000 b/d in 2004 – and motor diesel by 18% or 85,000 b/d. Shortfalls in generating capacity and coal availability led to an unusually high 147,000 b/d growth of oil in power generation. Oil’s share of energy consumption growth in China has thus risen to 22% in 2004. Chinese oil consumption thus accelerated. It grew by 893,000 b/d in 2004 (15.8%), having increased by 380,000 b/d annually in 2002-2003 (an average of 7.1% per annum).” China’s recent demand spurt was in 2004 compounded by booming consumption in the rest of the world: “World oil consumption grew by 3.4% or 2.5mn b/d. This was the fastest rate of growth since 1978. As with total energy, all regions saw faster oil consumption growth than in 2003 and higher than the 10-year average.”
Production Increase
Although oil consumption rose sharply in 2004, oil production rose to match it. There was strong net growth outside OPEC of 965,000 b/d, which was about 200,000 b/d higher than the 10-year average. Prof Davies broke this down into four components: a 919,000 b/d increase from the FSU, with Russia contributing 741,000 b/d and Kazakhstan 184,000 b/d; a further 738,000 b/d combined rise from eight other non-OPEC producers – Chad, Ecuador, Angola, Equatorial Guinea, China, Canada, Vietnam and Sudan; a decrease of 546,000 b/d combined from the mature UK, US, Australian and Norwegian sectors; and a further 146,000 b/d decline among other non-OPEC producers.
“Meanwhile in 2004,” he continued, “OPEC production also rose rapidly – by 2.24mn b/d in total including NGLs – to 32.9mn b/d. This was the largest increase in OPEC production since 1986 and the highest level of OPEC production ever. The recovery was led by Iraq, where production grew by 677,000 b/d to 2mn b/d despite the uncertain security situation. However, production was still running about 500,000 b/d below pre-war levels. The rest of OPEC increased production by 1.56mn b/d. The increases were shared widely, with Saudi production expanding the most (362,000 b/d) and Venezuela growing strongly (358,000 b/d) as production partly recovered from the impact of strikes in 2002-2003. Record levels of production were registered by Saudi Arabia, Algeria, Nigeria, Qatar and the UAE.” (For production breakdown, see tables from the BP Statistical Review of World Energy, page 13).
