Strong demand growth from developing countries is expected to support
high oil prices as Opec has no effective competition.
The centre of gravity of the oil world is shifting inexorably towards developing countries, permanently changing the balance of power in the global oil market and supporting higher oil prices. Over the past decade, non-OECD oil demand grew at an average rate of 4pc/yr, while OECD demand contracted at an average of minus 0.5pc/yr. If these trends continue, non- OECD oil demand will overtake OECD demand as soon as next year.
Persistently strong growth in non-OECD demand is the main driving force behind rising prices over the past decade. OECD economies respond to rising oil prices by becoming more efficient in how they use oil and switching to alternative fuels such as natural gas. Non-OECD economies need oil to grow and will pay more to secure scarce supplies. Non-OECD oil demand grew by over 3pc last year, despite a 42pc increase in the crude price, while OECD demand fell by 1pc. Argus expects a similar pattern of sustained non-OECD demand growth and OECD declines this year.
Opec knows that it has a captive market and is happy to take the money rather than boost output to reduce oil prices. High prices no longer threaten its market share because the cost of developing new non-Opec supplies has risen sharply in recent years. Companies must now exploit more costly ultra-deepwater, oil sands and oil shale reserves — pushing the breakeven price for “new marginal extreme resources” close to $100/bl according to Total chief executive Christophe de Margerie
Private-sector companies are still struggling to grow production, despite record upstream spending. Virtually all growth in global oil output last year was supplied by Opec countries — from crude and “natural gas liquids and other” — despite the loss of Libyan exports. Non-Opec crude production fell slightly as multiple setbacks more than offset output gains in a few countries. This year, Argus expects non-Opec crude production to rise by around 500,000 b/d, with continued growth in the Americas and the former Soviet Union — but this assumes 2012 output problems are not repeated.
Opec members’ appetite for oil revenues shows no signs of abating — especially since last year’s Arab Spring. The estimated breakeven oil export price required to balance Saudi Arabia’s budget has more than tripled to around $90/bl from less than $30/bl in 2003. And Saudi oil minister Ali Naimi now seems to want an even higher price. “Our wish and hope is we can stabilise this oil price and keep it at a level around $100/bl,” he said this month.
There seems little prospect that oil prices will revert permanently to lower levels in the future. Prices slumped to under $40/bl during the Great Recession, but they started to rise again as non-OECD demand recovered. And any price weakness resulting from a further global economic slowdown this year is likely to be short lived. Those who see high oil prices as temporary — the result of Iranian threats to close the strait of Hormuz or of speculative investment — are missing the bigger story. Non-OECD economies that need oil for growth now have the scale and incentive to outbid mature OECD economies in the oil pricing game. At the same time, Opec no longer faces serious competition that could limit its price ambitions.
