Oil on a High

Why are oil prices rising? Experts from the energy industry give a little insight

Like the rest of the world, companies in Dubai also are facing the heavy burden of increased fuel costs. Imad Murtada, Assistant Manager – Transport, Agility, says, “This is affecting all of us. We are not the only ones suffering from loss of business. When this increase in prices of fuel hit us, we were unprepared. As we have yearly contracts made with our clients and customers, there was no going back on that. We had to incur those losses. When we talk about increasing our rates, some clients understand whereas others simply do not want to hear anything of it. To look for a way out, we decided on dissolving the old contracts and making new ones, but as the prices are going up every two weeks to 20 days, how practical is that? But now, with new clients, we are making contracts which do not deal in fuel at all, they talk about only the trucks. The cost of fuel will be charged as per the actual receipts.”

Traditional economics says that when supply fails to match demand, prices go up. But today, the supply of oil is matching demand and yet prices are going through the roof. Why is this happening? For how long are prices going to increase? How will this affect the prices of other goods globally? Answers to these questions are hard to find.

Producers as well as consumers are puzzled. Ali Al Yabouni, General Manager, Abu Dhabi National Gas Shipping Company; UAE Governor of OPEC and President, EAEE says, “A little more than six months ago, the oil market was in a state of turmoil, prices were breaking an unthinkable barrier of US$100 and markets went above the sustainable offset prices. Since then, prices have continued rising (reaching US$138 a barrel). Besides that, little else has changed. Oil production remains steady, commercial stocks remain at the five year average and we continue to ask the same questions we asked ourselves six months ago -Why are prices so high and for how long will they continue rising?”

“The fact is, there are two conflicting schools of thought,” he continues. “The first suggests that this is primarily a financial phenomenon with the financial speculators driving up prices by taking speculative decisions hence continuing the rise in prices. The second insists that the market is fundamentally tied with a dangerously low margin of spare capacity.”

Fatih Birol, Chief Economist, International Energy Agency (IEA) says, “We are entering a new world energy order. Emerging markets of India and China are putting their stamp on the demand. On the demand side, earlier it was the OECD countries such as US, Europe, Japan which were driving the energy demand growth. Now it is China and India who are driving the energy demand.

‘On the supply side, the oil picture in the last 25 years was that half of all oil production in the world came from international oil companies. Most of these companies, today, are going through difficult times as existing reserves such as those in the North Sea, Gulf of Mexico, etc., are declining and it is difficult to access new reserves. Therefore, today and in the future, we expect that the bulk of the oil and gas supply growth will be from national oil companies.”

The role of national oil companies is growing considerably. More than half of the world’s established oil reserves are in control of governments who restrict access to international oil companies. And a large percentage of those reserves are handled by countries which are a part of OPEC – the organisation of petroleum countries that leverages prices by adjusting supply.

With declining reserves and existing resources open to international investors which have already been tapped, the future looks set in the hands of the national oil companies. While international companies have to answer to investors relating to profits, national oil companies have a different set of priorities. Most are owned by their country’s government, and oil is the main revenue generator, so when making capacity decisions they tend to think of not only the international market but also the economy of their own countries.

Ali Al Yabouni, General Manager, Abu Dhabi National Gas Shipping Company; UAE Governor of OPOPEC and President, EAEE

The economies of China and India are booming with a marked increase in the demand for cars and hence petrol. The demand for cars in China last year surpassed that of Japan and in the near future it is expected to surpass that of the US, as well. Birol says, “No one has a right to blame these countries. They are simply following the steps of the OECD nations in terms of civilisation and modernisation. The main trade axis which would move from the Middle Eastern countries to North America will now move from the Middle Eastern countries to Asia through oil and gas imports. Many countries in the Middle Eastern region are making handsome profits and are poised to make even more revenues. That money should be used correctly.”

‘A good example to follow would be that of the UAE. The GDP of the UAE economy in the last 25 years, from 1980 to 2006, has increased by 300 per cent. And despite that phenomenal increase, the government was able to reduce the contribution of hydrocarbons to the overall GDP. Oil revenues are being used efficiently in other areas of manufacturing and the services industry thereby reducing the dependency on oil revenues in the long run.”

‘Leave oil before it leaves us,’ Birol “Energy has to be used more efficiently,” says Birol. “The use of energy has implications on the environment. The energy sector is responsible for 80 per cent of all emissions. If the rate of using energy, electricity, cars, coal continues, by the year 2030, there will be 42 GT of emissions in the atmosphere. Right now we are at 27GT. We are on a trajectory. In simple words, this will mean a six degrees increase in global temperature by 2030.”

‘The global policy agenda should be determined by climate change as this is the responsibility of all nations. Although developing nations argue that responsibility rests on the shoulders of the developed countries. This is correct because a big portion of carbon emissions from 1900 until today comes from the USA and Europe.”

“The picture of the future is changing, though,” continues Birol. “By 2015, the top emitters are going to be 1) China, 2) USA and 3) India. These three countries are going to be making 50 per cent of all carbon emissions. If this issue is to be addressed, it is important to get these three countries on board the Kyoto Protocol. Although, US climate change policy looks set to change by early next year, we have to see change in China and India. Some way has to be found to get these two countries on board ensuring them that their economies will be in no way harmed.”

Adapting to change seems to be the only way out for the time being, internally and globally.