Why will Oil Prices Fall?

Sunday, November 19, 2006
zaman.com

The world's oil supply is expanding. It is possible to meet increase in global demand comfortably with new reserves and new technologies. For example, the newly discovered oil reserves in the Gulf of Mexico that may contain 3-15 billion barrels will relieve production demands.

:: A slowdown has begun in global demand. High oil prices and slowdown in growth rates have brought about a decline in demand. This year, the demand of both Europe and the United States won't increase significantly. The increase in demand in China, which was at 900,000 barrels a day in 2004, will recede to 500,000 this year.

:: It will be easier for producers to meet demands. The increase in global oil production is 2,7 million barrels a day. After Saudis start oil production in Khursaniye in 2007, this figure will be 4.5 million barrels daily.

:: If the elections in Nigeria decrease the tension among the groups around the Niger River, a total of 500,000 barrels will also be marketed daily. Even if the other countries restrict production by preferring quality Niger oil, the daily supply will be around five million barrels.

:: Companies do not invest in any projects as long as they don't see a profit of $40 per barrel, despite high prices in the past two years. If companies believe that prices would remain high, they would allocate most of their profits for research and drilling work. Shareholders of ExxonMobil and BP will be paid $40 billion this year.

:: The OPEC members' restriction on oil production will not stop the fall in prices, either. They may make a decision to restrict the quotas, but there will always be countries that don't cooperate.. For example, countries which are short on cash, such as Venezuela, may not accept a decrease in their oil production in order to keep their incomes at a certain level and sustain their social spending. Libya and Algeria are still producing oil over their quotas. Russia, which is the biggest non-OPEC oil producer in the world, determines its own agenda. When Russia objected to a Saudi demand to restrict oil production in 2001, OPEC countries reached an agreement with Russia and the price of oil fell to $21 due to the high amount of supplies.