Pumping the fear factor out of oil
As more production comes online over the next few years, prices may
ease by as much as $20 a barrel.
By Steve Hargreaves, CNNMoney.com staff writer
August 18 2006: 5:26 PM EDT
NEW YORK (CNNMoney.com) -- This morning oil dipped below $70 a
barrel for the first time since late June -- and prices may ease
even further. Indeed, some analysts say that in two years, oil
could be trading $20 lower than that.
Crude has already slipped more than 8 percent over the last week,
pressured by the alleged plot to blow up airliners over the
Atlantic, BP's decision to keep half its giant Alaska oil field
open, and the truce between Israel and Hezbollah.
Most analysts don't expect oil to fall too much further in the
short term, as demand remains strong and uncertainty surrounds
supplies from Iran, Nigeria and Venezuela.
But the recent record-high prices have fueled a boom in
exploration. And as that boom begins to yield more oil, the
industry will gain a greater ability to ramp up production in one
place in order to make up for any shortfall elsewhere.
This should reduce the impact of a supply disruption in, say, Iran
or Nigeria, and ease what experts refer to as the security premium
that's currently build into oil prices.
"That [premium] is in the neighborhood of $25 dollars a barrel,"
said James Williams, an energy economist at the consultancy WTRG
Economics. "That number would go away, or most of it would go away,
if we had more spare production capacity."
According to the Energy Information Administration, a few years ago
the world had a spare production capacity of around 5 million
barrels a day. That meant if something happened to Iran's oil
exports, which ran at about 2.7 million barrels per day in 2005,
other oil producing countries could ramp up production and cover
the shortfall.
New production possibilities
But thanks to surging demand in the last few years, the world's
spare production capacity has dwindled to only around 1.5 million
barrels. That makes traders very nervous when the international
geopolitical scene heats up the way it has recently.
To make matters worse, most of that 1.5 million barrels is heavy,
difficult to refine crude in Saudi Arabia.
But the Saudis are working on the problem.
Last month the country had 46 rigs searching for oil in the
country, up from 19 at the start of 2002.
"By 2008 or 2009 you're going to have a lot more spare capacity in
Saudi Arabia than there is now," said Adam Sieminski, chief energy
economist at Deutsche Bank, noting that there would be around 2
million extra barrels per day of high quality crude.
Sieminski also said the Saudis should have more refineries built by
2011, which will help to alleviate the bottleneck at the refining
level, which has also helped push up prices.
"That's how you get back to $45-$50 a barrel," he said.
There are of course a myriad factors affecting the price of
oil.
Both Sieminski and WTRG Economics economist Williams point out that
a drop in demand sparked by a worldwide recession would also bring
prices down in a hurry. And the list goes on.
"Certainly it wouldn't hurt [to have] more crude you have in the
supply chain," said Katherine Spector, an energy strategist at J.P.
Morgan. "But that's just one thing on a long list of
variables."
Source:CNN
August 18 2006: 5:26 PM EDT