Data Suggests Global Economy “More Vulnerable than Ever” to Price of Oil

Rising oil prices have had significant negative impact on the global economy, according to new economic research.  As oil prices approach historical highs, the global economy may suffer from another “price shock,” warns Dr. Minqi Li, associate professor of economics at the University of Utah.

Dr. Li’s regression analyses of world economic growth rate versus change in world oil consumption suggest that the global economy has not, in fact, become less dependent on oil in recent years, contrary to much previous research.

Furthermore, Dr. Li’s models show that world oil supply has become much less responsive to oil price increases.  As seen in the graph above, from January 1994 to May 2004, an oil price increase of $0.97 on average brought about an additional influx of one million barrels of oil to the world’s daily supply.  From June 2004 to November 2011, however, it took an increase of $11.80 dollars to bring about the same increase in daily oil supply.  The observed “world oil supply curve” has dramatically steepened by nearly 12 times.  This may have serious ramifications for future global economic growth.

“If world oil production does peak and start to decline in the near future, it may impose a serious and possibly an insurmountable speed limit on the pace of global economic expansion,” says Dr. Li.

To ensure sustained global economic progress despite the challenges of rising oil prices, we must seek out opportunities in the “Bridge Period” as emerging energy technologies become more cost effective, and traditional energy production becomes cleaner and more energy efficient.

Learn more about Investing in the “Bridge Period” by clicking here

 

Defying OPEC Veto, Saudi Arabia will Raise Oil Production Unilaterally

The Organization of Petroleum Exporting Countries (OPEC) met earlier this month and for the first time in two decades, failed to reach an agreement on oil production targets.  The June meeting in Vienna collapsed in disarray, with long-time Saudi Oil Minister Ali Al-Naimi calling it “one of the worst meetings we’ve ever had.”

OPEC member nations, led by Iran, which this year holds the revolving presidency post, vetoed Saudi Arabia’s proposal to raise oil output levels.  In a move of defiance, Saudi Arabia announced it will unilaterally raise its production rates to 10 million barrels a day in July, up from 9.3 million barrels.

Saudi Arabia’s move comes at a time when the world market is under strain.  The fighting in Libya has eliminated 1.3 million barrels from the world market, and turmoil in Yemen and Syria has removed another 300,000.  The fragile global economy may suffer if left to deal with sustained high oil prices, and Saudi Arabia has been under international pressure to take action to stem the rising tide.

However,  Saudi Arabia’s “cushion” of 2.5 to 3 million barrels a day of spare capacity might wear thin if unrest continues across the Middle East/North Africa region.  In short, despite Saudi action, many analysts say high oil prices are likely here to stay.

Read more here…

 

Triple-digit Prices Begin to Dampen Global Oil Demand: IEA

The rapid ramp up in oil prices has had an effect on global demand levels, reports the International Energy Agency (IEA).

High prices combined with lowered growth prospects for the developed world has spurred the IEA to cut its global oil demand forecast.

IEA data indicates global oil demand was essentially flat in March 2011 for the first time since the summer of 2009.

Although March data may be skewed as a result of holiday timing, weather trends and the earthquake and resulting nuclear disaster in Japan, the IEA nevertheless says “$4/gallon gasoline is likely to yield an anemic US driving season.  This is the main change to our demand forecast – a weaker 2011 profile in North America” as “high oil prices may have finally begun to dent demand.”

Based on these predictions, the IEA is expecting 89.2 million barrels per day (mbpd) in global demand; a growth rate of +1.5% compared with a growth rate +3.3% in 2010.

IEA analysis of the supply side notes a 1.3 million barrel per day decrease in OPEC oil production since the beginning of the Libyan crisis in February.  The IEA does not expect Libyan oil production to come online at all during the 2011 year.

Read more…

 

Oil Prices Hit 2 1/2 Year High on Middle East, Africa Worries

Brent crude prices topped $122 a barrel today as oil prices traded at their highest levels in 2 1/2 years since the highs of 2008.

“The whole commodity complex seems to be on the boil again,” said Edward Meir at MF Global, discussing the continued violence in Libya, Yemen and political unrest in Nigeria over delayed elections.

China’s announced an increase in interest rates which briefly triggered a price decline of about $1/barrel in early trading.  However, the effect was quickly reversed as traders feared the events in Nigeria would further constrict global supply of highly desired light, sweet crude.

Saudi Arabia has boosted output to make up for missing capacity from Libya, but will it be enough? “Spare capacity is eroding and together with the geopolitical backdrop where Nigerian outages are very much on the cards with the upcoming elections, upward pressures on prices could well continue,” writes Barclays analyst Amrita Sen in a note.

Skyrocketing oil prices have prompted responses from global leaders.  UK Energy and Climate Secretary Chris Huhne and Saudi Arabian Oil Minister Ali Ibrahim Al-Naimi both made public statements addressing the major run-up in oil prices in the marketplace this week prior to a meeting in Riyadh.

The current oil price – which reached levels not seen since the all-time record set in the summer of 2008 – does not “reflect the realities” of supply and demand as they really exist in the global energy market, said Mr. Huhne, who called for “greater understanding between consumer and producer countries” in an effort to avoid inflation.

Former Saudi oil minister Sheikh Zaki Yamani has warned that continued political unrest could push barrel prices in the $200 – $300 range.  Read more…

 

Asian Nations to Boost Strategic Petroleum Reserves

The political upheaval across the Middle East and North Africa and resultant spike in oil prices has clearly demonstrated the oil vulnerability of many major Asian economies. As a result, countries such as China, India and the Philippines are looking to boost their strategic petroleum reserves.

Many emerging Asian economies do not have sufficient reserves to safeguard against supply shocks unlike many industrialized Western nations, which began to stockpile oil reserves following the 1973 oil crisis.

The Philippines government made specific mention of the events in Libya last week when it announced new regulations requiring domestic oil companies and refineries to maintain 15 days and 30 days respectively of oil reserves.  It also proposed an emergency fuel-sharing deal with Japan.

China also has ambitious plans for its strategic reserve stockpile.  Although it is the world’s second largest importer of oil, China’s petroleum reserve program only began in 2006.    Current reserves will only supply 10-15 days of oil demand, but by the end of 2020 China aims to build a 500 million barrel oil reserve stockpile; enough to meet roughly 3 months of imports and the second largest strategic petroleum reserve in the world.

More than half of China’s oil is bought overseas, and the nation is becoming more and more dependent on imported oil.  Adding to its reserve stockpile will increase its already high oil purchases and make China an even stronger market presence.  It’s accumulation plan “is likely to be a feature of the global oil market not only this year but this decade,” according to  Soozhana Choi, head of Asian commodities research at Deutsche Bank Singapore.  Read more…

 

Saudi Arabia Raises Oil Output as Libyan Production Halts

The crisis in Libya, the world’s 12th largest oil exporter, has resulted in severe disruptions to oil production and driven the nation’s exports to a halt.

Although Libya accounts for only a small percentage of total global supplies, the oil it produces is of particularly high quality.  The majority of Libya’s exports go to Europe, which has been hit hard as a result of this upheaval.  The International Energy Agency (IEA) has estimated that between 500,000 barrels per day (bpd) and 750,000 bpd have been removed from the market as a result of the Libyan crisis.

Saudi Arabia has responded to cover supply losses by increasing its output by 8% to over 9 million bpd.  Saudi oil, however, is of lower quality than Libya’s and thus is not an exact replacement for all refiners.  The IEA notes that most European refiners have covered all their oil needs through next month, and there is no fear of an immediate supply shortage.

Nevertheless, anxious investors pushed oil to near-record trading prices this week, with Brent oil up to nearly US$120 a barrel on Thursday, the highest level seen since July of 2008.  Prices have come down since then, but we continue to expect heightened volatility in the market as the political turmoil continues in the Middle East.  Read more…

 

Middle East revolutions and alternative energy : water

By Avril David, The CSR blog at Forbes.com:

“As protesters across the Middle East continue their fight for democracy and liberation, speculators have drawn attention to the inevitable impact of this instability and change on the oil and gas sector, in oil price spikes.

Looking at these two trends—calls for democratic empowerment and spiking oil prices—it seems that we could be nearing the time for seriously putting the renewable energy discussion (and renewable energy partnerships) back on the table.

On January 17 at the World Future Energy Summit in Abu Dhabi, U.N. Secretary General Ban Ki-Moon called for a “global clean energy revolution,” saying that “investing in the green economy is not simply a luxury of the developed countries. It represents opportunity for job creation and economic growth in developing countries.”

As we hope for a sustainable and robust transition to democratic empowerment in countries across the Middle East, perhaps we can also begin envisioning what new models for international energy partnerships might look like, models that are based on a shared foundation of and commitment to democratic empowerment. If handled right, economic growth, political empowerment, and renewable energy solutions could work together as a mutually reinforcing system in a newly democratic Middle East.

Take the issues of Egypt as an example. According to the U.S. Energy Information Association, Egypt’s oil production peaked in 1996 at 935,000 barrels a day. Since then, production has declined by nearly 30% to about 660, 000 barrels a day. Food prices in Egypt used to be subsidized by oil revenues, and those subsidies were significantly cut back, despite record high global food prices in 2010, adding to the frustrations of an already struggling population.

To add to this already difficult picture, the city also suffers from what water experts refer to as “genuine water scarcity” (Pacific Institute, 2002), which is caused by general climate dryness and large fluctuations in the area’s limited rainfall. According to the Pacific Institute’s Water Resources Index, Egypt will be considered a “high stress” water region by 2025, plagued by frequent shortages. Cairo’s growing population adds to the city’s water management problems. As more unplanned settlements are added to the city, the eastern boundary of Cairo gets pushed further out to undesirable lands in the desert without access to planned or natural water sources.”

Read the entire article

 

Turmoil in Middle East Launches Oil Over $101

The political turmoil in the Middle East has pushed oil prices over $101 a barrel, its highest level in over two years and an important psychological marker for the market.

The immediate worry on the minds of many investors is that major political unrest in Egypt could result in the closure of the Suez Canal and the 200 mile Sumed pipeline – an important link between the Red Sea and the Mediterranean Sea. About 5% of the world’s sea-borne crude oil travels through this canal.

However, data from the U.S. Department of Energy shows the Suez Canal and the Sumed pipeline carried 2.1 million barrels per day (mbpd) in 2009, well below its total capacity.  Closure of these conduits, currently under control of the military, would cause a disruption, but not a complete halt, to regional oil flows.

The market is also concerned that political uprisings in Egypt, Tunisia, Algeria and Yemen could intensify instability amongst some of the more significant oil exporters in the region, such as Saudi Arabia.

Although analysts clearly see a “fear factor in the market,” the International Energy Agency (IEA) points to “fundamental differences from the situation today and the situation in July 2008,” when oil reached an all-time high of $146 a barrel.

Global oil stocks are also nearing 10 year highs, the agency says, and would be sufficient to cover approximately 61 days of forward oil demand.  Spare tanker capacity is high enough now to deal with such potential disruptions for now.  Read more…

 

Emerging Economies Drive Growth in Primary Energy Demand: BP

Over the next 20 years, emerging economies will drive a 40% growth in primary energy use, says BP in its annual Energy Outlook 2030 report.

The total use of fossil fuels will decline as renewables such as solar, wind and geothermal, as well as nuclear and hydro-power increase their contributions to the global energy mix.

For the first time, these technologies will provide the largest source of growth in new energy, from 5% today up to 18% by 2030.

BP predicts the overall use of fossil fuels will decrease.  Fossil fuels contributed 83% to the growth in energy from 1990-2010, however between 2010-2030 levels will likely drop to 64%.

Oil’s share of this total will gradually decline as use of natural gas use rises.  Despite coal’s recent spike in response to voracious demand from China and India, BP predicts a reverse in its growth trend by 2030.

A whopping 93% of energy growth over the next 20 years will come from emerging economies as Chinese oil consumption grows by 8 million barrels a day (mbpd).  By 2030, Chinese consumption will likely reach 17.5mbpd, bringing it ahead of the United States as the world’s largest consumer of oil.

New energy regulatory policies and the deployment of clean technologies may help slow carbon emissions, BP says, however total global emissions in 2030 are predicted to be 27% higher than today.  Read more…

 

Read our January 2011 Newsletter – now available

The January 2011 edition of Global Fund Exchange’s “Investing in the Future of Energy” newsletter is now available on our website.

Top stories this month include:

• China’s Energy Leadership in 12th Five Year Plan
• Natural Gas Reserves in the United States
• India’s Push for Solar Power
• Bull Rally in Oil Prices

Click here to download our latest edition or register here to join our mailing list.