The price of oil in 2010

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)

By D. H. Pai Panandiker

Crude oil prices recovered much faster than the world economy. It is also quite likely that they will continue their climb well into 2015 when alternative sources of energy will become more economical.

After touching $147 a barrel in July 2008, the price of oil had fallen to $47 when the world economy was deep in recession. But before the end of 2009 the price was back to $75-$80 mainly because of the liberal cut in oil supplies by the OPEC and overbought position in oil futures.

The world demand for oil in 2009 was 84.1 million barrels a day. Non-OPEC sources supplied about 50.4 m/bd leaving the OPEC to cover the rest. OPEC had cut its quotas to 26.6 m/bd though some of the members, principally Nigeria, did exceed the quota towards the end of 2009.

At the emergency meeting in Angola on December 22 OPEC members agreed to maintain the same level of production with strict adherence to quotas.

The US is the major consumer of oil with a 22.5 per cent share in world consumption. Its demand for oil in 2010 is estimated to increase at 1.37 per cent.

China and India account for 10 per cent share but their demand in 2010 may rise by about 5 per cent. OPEC is relying mainly on these countries to design its production plans.

In 2008-09 oil prices have been subject to violent fluctuations. One reason is the rampant speculation encouraged by higher risk to which stock markets were exposed. Volatility of oil prices also hit investment in oil exploration.

In 2009, IEA estimated that investment was down 21 per cent or by $100 billion. As such, production capacity will not increase significantly, though OPEC members do nurse about 5 per cent spare capacity to meet unforeseen demand.

International prices in 2010 are likely to continue the climb which was witnessed in the second half of 2009.

First, the OPEC is likely to keep its hold on supplies since it has come to the conclusion that a price below $80 a barrel is uneconomic; second there is bound to be increase in demand mainly from China and India; third, the dollar is likely to fall against the euro and the yen and encourage speculation as well.

In the first half of 2010 prices may still move in the range $75-80 a barrel. But in the second half when the world economy is likely to gather speed the price may jump into the range $80-85.

That will not be the end of the story. The price of oil will keep its climb well into the 2015 when it may touch $150 a barrel.

The year 2010 is critical. For one, countries will have to reduce carbon emissions to honour their commitments in Copenhagen. Hence fuel efficiency and carbon capture and storage (ccs) will have high priority. For another, alternative sources of energy will be explored to beat the high price of oil.

(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)