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Oil in a Week – Oil Markets Awaiting the Unknown
Published in AL HAYAT on 20 - 03 - 2011

Since the beginning of 2011, oil markets have been facing many sudden questions and challenges. These started with the increased demand for oil in the United States, the world's biggest consumer of oil. Consumption levels there rose despite the fact that prices had soared beyond the 75-85 dollars per barrel range, which most OPEC countries called for, to the range of 90-100 dollars. What was strange is the fact that demand not only rose in emerging Asian nations, but also in the United States, where demand was poised to fall.
It was assumed, according to past experience and economic theories, i.e. with demand declining following recessions and price hikes, that the opposite should happen, or in other words, that prices should fall in light of these facts. But then the major and sudden political shifts in the Arab world came. However, the events in Tunisia did not cause widespread concern in the markets, because oil production in this country is limited and is mainly used for domestic consumption.
Even the young people's protests in Tahrir Square in Cairo and the strikes in various Egyptian sectors did not affect the markets too much. The focus instead was on the issue of the passage of oil tankers through the Suez Canal, the flow of petroleum through the SUMED pipeline, from the Gulf of Suez to the Mediterranean though the Egyptian territories, and the concern that oil supplies from the Gulf to Europe might be interrupted. However, it is known that both the Suez Canal and SUMED continued to be in operation regularly, and no interruptions in supplies took place. Nevertheless, panic struck in the markets, despite the fact that no actual halt in supplies happened. As a result, prices soared and speculation increased, but this is an expected matter in global markets.
Then markets began to be further gripped by fear with the outbreak of revolution in Libya. Despite the fact that Libyan oil production is set at around 1.7 million barrels per day, or one to two percent only of global oil output, it is very desirable in the market, especially in Europe, since it contains a small concentration of sulfur, making it very much in line with environmental standards in the continent. With the start of bombings targeting oil installations in Ras Lanuf, some expected prices to rise to the record levels of 2008, due to the possible shortage of Libyan crude oil exports or petroleum products. However, the difference between 2011 and 2008 lies in the fact that surplus production capacity exists this year, especially in Saudi Arabia, UAE and Kuwait, with an overall surplus capacity of six million barrels per day, far exceeding Libya's production capacity if it should be completely halted.
Saudi Arabia in particular has the ability to compensate the markets with the desirable low-sulfur light oil crude. In addition, there is a surplus refining capacity worldwide. Owing to this surplus production capacity, and the awareness in the markets that both the political will and the ability to bring about balance in the markets are present in the major oil producing countries – with a view to prevent prices from soaring to extremely high levels that would hurt the global economy and consumers in emerging nations-, prices have been maintained at reasonable levels under these circumstances, albeit above the 100 dollars per barrel mark.
Yet, the shadow of the unknown still looms over the markets. With the earthquake and tsunami in Japan, and the radiation leaks there, some have expected that these developments will have a large impact in the world's third largest oil consuming country, especially with the massive disruption in nuclear power generation. However, what actually happened was that Japan replaced the halted nuclear power generation with liquefied gas imported from Indonesia and Qatar to generate electricity. It is worth noting that 25 percent of Japan's refining capacity has been destroyed as a result of the disaster that struck the country. This means that Japan will be forced to import petroleum products in lieu of crude oil. Nevertheless, as a result of the devastation suffered by the Japanese economy, and the decline in consumption, production and exports during this difficult period, it is expected that oil consumption in Japan would shrink.
The markets hence are dealing with many difficult questions at the same time. First of all, what repercussions will the current unrest and shifts have on the safe arrival of supplies, in a timely manner? Despite the presence of adequate reserve supplies of crude oil, petroleum products and liquefied gas, the sudden shift in the sources of these supplies, from one producer to another, no doubt leaves its mark on global oil markets, and increases speculation and the ensuing impact, which drives prices upward, even though there is no shortage in supplies.
Most importantly, the second question involves the uncertain future. What are the implications of the major political changes taking place in Arab countries and the Middle East in general on oil markets, especially if more revolutions and uprisings take place and escalate? Is it possible that these developments will lead to armed conflicts among countries in the region, and what role will the major powers play in these conflicts? These are questions that must not be overlooked from now on, and are at the heart of the many questions raised by oil industry officials. On the other side of this uncertainty, there is another question: What will be the effects of the worst nuclear catastrophe currently witnessed in the world? The timing of this disaster takes on major significance for the energy industry in the medium and long term, more than the near term. Recently, Western industrialized countries managed to restore confidence among their citizenries regarding the use of nuclear energy in power generation. However, in the aftermath of the disaster in Japan and the devastation that struck the three nuclear reactors in Fukushima, Western countries have begun to reconsider their nuclear policies, especially Germany, which decided to review its previous policy on extending the lives of ageing nuclear plants. This will translate into significant changes in future energy investments, and the levels of fuel usage in generating power once more.
*. Mr. Khadduri is an energy expert


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