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Oil Prices Never Satisfy Anyone – OpEd


By Wael Mahdi*

India is a beautiful country and it is also one of the world’s fastest growing economies  – and the Indians now that. They also know that they need more energy to keep this big machine growing. More importantly, the Asian country needs affordable energy to grow. The Indian perspective on energy was outlined in New Delhi last week, at an event where energy ministers and officials from around the world gathered as part of the consumers-producers dialogue that was launched in 1990.

Top officials from countries such as Saudi Arabia, the US, Iran, Russia, the UAE, Algeria, Egypt, Bahrain, Japan, Kuwait, South Korea, Egypt, Mexico, Norway and Jordan, and heads of international organizations such as OPEC and the International Energy Agency (IEA) all participated in the dialogue.

Since the early 2000s, the dialogue has been held under the umbrella of the Riyadh-based International Energy Forum. Officials gather regularly to debate issues such as energy markets’ stability, climate change policies, and the future directions of the industry. At the heart of their discussions, though, is the issue of energy and hydrocarbons prices.

In India, no one seemed happy about oil prices; neither the consuming nations nor the producers.

Under the producers, there are two groups. There are those such as Saudi Arabia and Bahrain, who believe that the current oil prices of Brent which are fluctuating between $60 and $70 aren’t high enough to bring back lost investments to the oil and gas industry. And there are others such as Iran, who say oil prices at $60 are reasonable and satisfactory.

For the consuming nations such as India, prices at $70 hurt and an oil price of $50 is more reasonable and fair to them.

It seems very hard to reconcile the two views but it is certainly obvious to everyone that more prices are needed for supply to match the expected growth in demand.

There are some views from consumers that the issue of investment is becoming an excuse for higher oil prices from producers.

It is easy to argue that shale oil and other unconventional sources nowadays need only $50-$60 to break even and produce more. Still, the world needs five million barrels a day every year of new capacity just to make up for the natural decline in conventional oilfields worldwide, let alone a new increment to meet demand, and this capacity addition won’t come if oil prices are not at a certain level.

What is that price level? Speaking to reporters in New Delhi, Saudi Energy Minister Khalid Al-Falih said that that current oil prices won’t bring back big investments but he didn’t know what price could do that.

The decline in investments over 2015 and 2016 was huge and the recovery in oil prices that started last year and extended to this year isn’t bringing back the needed investments, many in the industry argue.

In 2016, global energy investments amounted to $1.7 trillion, yet that was a 12 percent fall from 2015, which also saw a fall in investments from 2014. OPEC estimates that the world needs more than $10 trillion in energy investments to meet the rise in demand till 2040.

Last month in CERAWeek in Houston, Fatih Birol, the executive director of the IEA, which represents consumers’ interests, said that investments in 2017 were flat and 2018 isn’t looking much better.

“Investments are not sufficient to make us feel comfortable; the investment appetite is still weak,” he said.

OPEC Secretary General Mohammad Sanusi Barkindo shared Birol’s sentiment at the same panel in Houston. He said investment in 2018 isn’t looking “very positive,” and that it’s a concern of oil producers and consumers.

So everyone left India without an agreement on what oil price is needed to keep both producers and consumers happy.

Some year ago, OPEC ministers had a price range that was between $70 and $90 and at some points as much as $100.

Today everyone wants the market to determine that level but that won’t happen. So in a few years, we might see a supply crunch between 2020 and 2022 or we might see more cost cutting from international oil companies and unconventional oil producers to adjust to new realities.

OPEC producers must wake up to that reality too. Oil prices should reflect the cost of investments and stability and not fiscal needs. And OPEC must be active and not passive in finding a solution. Instead of cursing the darkness they should jump in and fill in the investment gap in the industry using their own funds. They must invest in research to find better technologies to keep demand for oil continuing. Otherwise, nothing will change.

  • Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi

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