The need for black gold
Oil reserves in the Middle East and North Africa account for more than half of the world’s reserves. “We face a lot of challenges if political unrest starts in that part of the world”, says Thina Margrethe Saltvedt, Senior Analyst of Macro/Oil and Global Commodities, and Strategist at Nordea on her visit to Nordea in Luxembourg.
Thina Margrethe Saltvedt underlines at the beginning of her presentation at Nordea Bank in Luxembourg that it took some time before we began seeing the massive oil price increases from 2003 to 2010. For 2013 she predicts $108 US dollars per barrel and for 2014 $111 dollars. “Oil prices will increase over the next few years but they will also trigger more investments in all kinds of energies”. She thinks that oil will remain important, especially for the transportation sector, which accounts for more than 50% of global oil consumption, a share which is expected to rise.
Amongst the factors influencing the price of oil, there is the recent terrorist attack in Algeria. “This incident, which had a deeper impact on natural gas than on oil prices, shows us how dependent all our economies still are on this region of the world”, she adds. Algeria is the third largest gas exporter to Europe, behind Russia and Norway.
Often, it is political issues that drive the prices. In the beginning of 2012, the political tensions between Iran and Israel were high on the agenda, as well as the conflict in Syria and the risk of a fiscal cliff in the US. On the demand side, it is economic growth that impacts the price of oil. But there is more to it: “You have population growth and increasing living standards, especially in emerging markets like China and India. More people buy cars, but they also buy more products and services that are shipped around the world on vessels, which increases oil demand as well”.
Statistically, the OPEC, the Organization of the Petroleum Exporting Countries, still has the control with its biggest contributor Saudi Arabia, the world’s swing producer, possessing more than 16% of global reserves.
Iran and Iraq trail behind the leader of the pack with 9.15 and 8.7% respectively. Apart from the risk of unrest in that area of the world, where some of the largest oil exporters are concentrated, Thina Margrethe Saltvedt worries about OPEC’s spare capacity, which is at uncomfortably low levels. “One incident can make the price go up significantly. Take for instance the rumour that an oil pipeline exploded in Saudi Arabia; oil prices went up four to five dollars per barrel within two hours”.
Another example that shook the market in a more sustained way was the Deepwater Horizon explosion in the Gulf of Mexico in April 2010, which caused the death of 11 people, and provoked an oil spill, which flowed unabated for three months. It took the markets two years to return to full production levels after this. “That is why a buffer is vital to the oil market; if it is solid, prices will not move even when there is an incident or even a rumour, because the markets will not worry about getting the supply they need. With new production coming from Iraq and North America, the situation is improving somewhat”, she notes. What might be worrisome is the fact that only two of the world’s top fifteen oil exporters are politically stable: Canada and Norway.
Exporters’ breakeven oil price will influence the price of oil. In 2007, Saudi-Arabia needed an oil price of $50 US dollars a barrel to break even; in 2009 that baseline went up to almost $90 dollars. In Kuwait this has doubled from $40 to $80 over the same period of time, and in Venezuela it went up from $70 to $120. On average, OPEC countries need a hundred dollars per barrel to break even. If the price drops below that level, a new round of uprising in the impacted countries might be triggered.
If you look at the changes in export volume between 2011 and 2017, Iran and Saudi Arabia are the two countries where exports will drop the most significantly. “In Saudi Arabia there will be a growth in population, so they will start to use much more of the oil for domestic purposes and this will mean that export capacity will narrow. To compensate for this we will need countries like the US, Canada and Brazil to start producing more in order to face the growth in demand”.
Apart from these more classic explanations for the changes in oil prices, the Nordea expert from Norway named two more influences. Deepwater drilling is a necessity to balance the market; in the Gulf of Mexico and in West Africa this type of production is moving up on the agenda. She also mentions the US shale oil/gas revolution, which can make North America energy independent. At current rates, there is enough potential to satisfy more than 100 years of consumption.
Mrs Saltvedt also spoke about her home country, the world’s eighth biggest oil exporter. “Oil investments in Norway have been boosted by high oil prices, new discoveries and access to new areas. After 20 or 30 years of small discoveries, things have changed with a large discovery made more than two years ago”. Substantial discoveries, such as the giant Johan Sverdrup in the North Sea, and Havis and Skrugard in the Arctic, have revived expectations.
At the same time, she mentions that the drilling costs and difficulties in finding enough engineers for all the new projects are also growing. New drilling areas on the border with Russia have opened up along with new areas in the Arctic region.
To sum it up, the oil bonanza in Norway supports economic activity, growth and employment, but companies also need to invest in services from the oil industry value chain. She remarks that we saw during the financial crisis that if investments stop, demand will decrease. CW