Baku, Azerbaijan, Nov. 11
By Vagif Sharifov - Trend:
While OPEC is preparing for a meeting scheduled for November 27, the heads of the world's largest oil companies will hold a protective position, being over cautious regarding their future investments.
At the mentioned meeting a decision will be made on what to do with the oil supplies.
U.S. giant ConocoPhillips plans a decrease in expenses by $700 million in 2015, while Chevron took some time to think it over.
The market situation is very tense for the oil industry people who, in the last several years, have made investments based on about $110 per barrel. Brent average spot price in October exceeded $87 per barrel compared to over $97 in September, as well as over $109 per barrel in October 2013. The November price for this oil is by third less than that in November 2013.
OPEC is very contradictory amid these prices. On the one hand, it urges not to panic, while on the other hand the organization believes that $100 per barrel will be convenient for oil producers and consumers, as there's only $12-$15 per barrel missing for this level of comfort.
The market will balance itself, according to OPEC senior managers. Although the second half of this year, as well as many facts of the 20th century, testify that there is no oil price formation on the global market.
Indeed, very low oil prices will reduce investments in the energy sector, while extra high prices will reduce consumption. How to find the middle ground?
On the one hand, low oil prices will reduce prices on petrol, diesel fuel and gas - this is vital for small and medium entrepreneurship. On the other hand, they will reduce the number of jobs.
Some in the U.S. already say that if the prices become too low, the capital expenditure in oil projects will also be reduced. These expenses are directly connected with the increasing number of jobs.
It seems like in late November, OPEC will try to stabilize the prices at around $100 per barrel in the shortest term. Many representatives of large oil companies are confident of that and the Cartel, which ensures 40 percent of world oil supply, will decrease the production and subsequently, the prices will rise.
One of the top managers of the Total company believes that large oil companies will naturally withstand the price at the level of $80 per barrel, however, he doesn't think that the current price will hold on for long.
Many large banks, consulting companies, think tanks expect that the price for the Brent oil will be $95-$103 per barrel in 2015. The US Energy Information Administration (EIA) forecasts that the average price will be $101.95 per barrel throughout 2015. And exactly this price is the desired middle ground.
The assumptions about the growth or termination of further fall in oil prices, to some extent, are based on the expectations about the stable increase in the world oil consumption by almost 60 million metric tons in 2015.
The demand for oil will be equal to 92.3 million barrels per day in 2015, compared to 91.1 million in 2014, according to the reference case forecast of OPEC.
The assumptions and the deepest hopes for the increase in oil prices are also based on the predictions of economists and managers, according to which, extra cheap oil will greatly hinder the economic development and will not allow to fully ensure the energy security of the growing population.
World population will hit 9 billion by 2040 and everybody will need a job, mechanisms, food, heat and cheap Wi-Fi, since over 60 percent of the population will be living in cities.
People living in cities mostly use cars the number of which will be near 1.3 billion in 2015. This is while OPEC forecasts that their number will hit 2.6 billion by 2040.
The most part of the population growth and, of course, consumption of the world resources will fall on developing countries. By 2028, India will become more populated than China.
The basic system of maintaining the elementary vital functions in today's world is electricity supply. This sector takes one fifth of the world's oil today. Alternative energy is so rudimentary that it will take at least 25 years for a little more than 1 million barrels of oil per day to be freed from the global power industry. The electricity sector, compared to the oil sector, is just as big on the number of investments and jobs.
Nobody actually needs cheap oil, despite the indirect evidence that it supposedly will make it possible to reduce prices for such services as air transportation and delivery of goods over long distances by land and sea.
The reality is that the falling prices increase the time of return on investment, and not all managers are willing to take the risk. This will lead to the inhibition of the development of each sector of the economy, which will result in the reduction of jobs, wages and the Happy Planet index.
Certainly, oil production will not stop due to the low prices, at least because the break-even price of the onshore oil production is $27 per barrel in the Middle East and $40 per barrel in the North Sea. But it will negatively affect the macroeconomic indexes of the countries, the access to large international loans, investment attractions.
OPEC's November annual report said that world real GDP growth in 2015 will amount to 3.4 percent, and it doesn't mention the falling oil prices at all. On the contrary, the price per barrel of the OPEC oil basket in nominal price terms will reach $124 by 2025, and $177 by 2040. The US also forecasts the long-term increase dynamics of oil prices. The recent EIA's (Energy Information Administration) reference case forecast indicates the fact that the price for Brent oil will amount to $109 per barrel by 2025 and $141 per barrel by 2040.
Vagif Sharifov is the Development Director at Trend Agency