Global Supply and Demand
Professor Paul Stevens
Senior Research Fellow (Energy) Chatham House
Professor Emeritus, University of Dundee
Visiting Professor University College London (Australia)
Energy Security in a Multipolar World - Closing Conference
The Royal Society 12th December 2012
Presentation outline
• The Context
– Currently huge uncertainty over energy markets
– Therefore a very large potential agenda….
• The Focus: Oil and two new dimensions
– The Arab Uprisings
– “OPEC’s Dilemma”
2
The legacy of the Arab Uprisings is …
• Need to pacify populations
Saudi nationals employed
by the government
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
1990 1993 1996 1999 2002 2005 2008 2011
3
The legacy of the Arab Uprisings is the need
for a higher “supply price”
OPEC Median Budgetary Break-Even Price
• Need to pacify populations
140
120
• “Supply price” risen. Saudi
Arabia 2008 =$50 2012 =$94
US$ per barrel
Saudi nationals employed
by the government
100
80
60
1000000
40
900000
800000
700000
20
600000
500000
400000
0
300000
200000
100000
0
1990 1993 1996 1999 2002 2005 2008 2011
Source: Ali Aissaoui Apicorp Economic Commentary Vol 7 N0. 8-9 August-September
2012
4
But a higher supply price leads to “OPEC’s dilemma”
• They need higher prices to survive politically
• BUT Higher prices = more oil demand destruction
• AND Higher prices = increasing oil supply creation
• BOTH create self destruction
5
Demand destruction?
Conventional views of future demand – meet the MICs
Oil demand by region IEA New Policies Scenario 2010
120
100
Million b/d
80
REST OF OECD
MIDDLE EAST
60
INDIA
CHINA
40
OECD
20
0
2009
2015
2030
2035
The key point: The MICs account for the bulk of the growth
= 68% in Non-OECD growth 2009-35
Demand destruction in the past?
What were these conventional views of future demand missing?
OECD Oil Demand Forecast 1977
1200
1000
Mntoe
800
USA
600
Japan
Rest of OECD
400
200
0
1974
1980
1985
World Energy Outlook OECD 1977
GDP Assumptions
OECD
1974-80 4.3
1980-85 4.1
Demand destruction?
What are the conventional views of future demand missing?
THE IMPACT OF PRICES
OECD Oil Demand Forecast 1977
1200
1000
Mntoe
800
USA
600
Japan
Rest of OECD
400
200
0
GDP Assumptions
OECD
1974-80 4.3
Actual
2.7
1974
1980
1985
actual 1985
1980-85 4.1
World Energy Outlook OECD 1977. Actual BP Statistical review of World Energy 2009 Actual
2.6
Is the IEA again neglecting price?
• WEO 2012 gives a very
limited range of prices
Oil Prices 2001-2020
140
120
US$ per barrel
• It also seems to neglect
the rise in prices since
2002
100
80
60
40
20
2019
2014
0
Jan-2001
Jun-2001
Nov-2001
Apr-2002
Sep-2002
Feb-2003
Jul-2003
Dec-2003
May-2004
Oct-2004
Mar-2005
Aug-2005
Jan-2006
Jun-2006
Nov-2006
Apr-2007
Sep-2007
Feb-2008
Jul-2008
Dec-2008
May-2009
Oct-2009
Mar-2010
Aug-2010
Jan-2011
Jun-2011
Nov-2011
Apr-2012
Sep-2012
• BUT it is more than just
the price of crude oil…
Europe Brent Spot Price FOB (Dollars per Barrel)
New Policies IEA import price
Current Policies
450 scenaruo
9
So what?
• Remember the MICs!! All did
have very high levels of subsidy
on final oil product prices
280
Retail prices January 2003 = 100
260
240
• But now signs of reform…
– India
• Begins in 2002. Deregulated gasoline
prices in 2010
– China
• Begins 2009 constant changes
including talk of sales taxes
– Middle East
• Moves to increase price given rapid
consumption growth eating into export
capacity although in the current
political climate this is difficult
220
200
China
Gasoline
180
China Diesel
160
India (Delhi)
Gasoline
140
120
100
Sources China Reuters, India Mypetrolprice.com
10
So what?
• Remember the MICs!! All did
have very high levels of subsidy
on final oil product prices
280
Retail prices January 2003 = 100
260
240
• But now signs of reform…
– India
• Begins in 2002. Deregulated gasoline
prices in 2010
– China
• Begins 2009 constant changes
including talk of sales taxes
– Middle East
• Moves to increase price given rapid
consumption growth eating into export
capacity although the current political
climate is difficult
220
200
China
Gasoline
180
China Diesel
160
India (Delhi)
Gasoline
140
120
100
Sources China Reuters, India Mypetrolprice.com
THIS WILL LEAD TO EVER MORE DEMAND DESTRUCTION
11
Supply Creation? Meet the “six brothers”
Sources of growth in oil production* 2010-2035
IEA WEO 2011 New Policies Scenario
16
14
12
Million b/d
10
Qatar Petroleum
NIOC
INOC
8
ADNOC
KPC
6
Saudi Aramco
Rest of the World
4
2
0
*Includes NGL's and unconventional oil
The “six brothers” account
For 91% of the growth
12
Supply creation? – The new technologies from
shale gas operations in a high price world
• Liquids from shale gas operations = now the mainstay
of the “shale gas revolution” in the USA
• Liquids from shale oil
• Liquids from “fallow oilfields”
• Liquids from other unconventional sources – oil shale,
tar sands
• Aided by the imperative of energy independence
13
“Energy independence” and the USA
• The new technologies make it a serious possibility for
North America although lower prices driven by export
restrictions could inhibit this.
• Will reduced import dependence = loss of interest in
policing sea lanes and seeking stability in the Middle
East?
– Assumes US foreign policy in MENA is driven by oil
– Ignores the fact that the oil market is “one big pool”
– BUT what of China’s perceptions and responses?
14
Conclusions
• “OPEC’s dilemma” is alive and well and threatening
• The result is likely to be significant price volatility
• This creates serious threats to the political stability of
the MENA region and hence supply– remember the
“six brothers”. This threatens even more volatility
• This price volatility will also create serious inhibitions
to new investment in the oil (and gas) upstream
compounded by geo-political uncertainties in MENA
15
Thank you for your attention
• Recent relevant publications from www.chathamhouse.org
– Paul Stevens and Matthew Hulbert - Oil Prices: Energy Investment, Political
Stability in the Exporting Countries and OPEC's Dilemma. Chatham house
Programme Paper, October 2012
– Paul Stevens - The “Shale Gas Revolution”: Developments and Changes.
Chatham House Briefing Paper, August 2012
– John Mitchell with Valérie Marcel and Beth Mitchell - What Next for the Oil and
Gas Industry? Chatham House Programme Report, October 2012
– Paul Stevens – The Arab Uprisings and the International Oil Markets. Chatham
House Briefing Paper, February 2012
16