Will oil hit $100 per barrel? (page 1 of 2)

The oil market is at one of its most interesting junctures. Like in any other market, the oil price depends on demand and supply, but in the oil market geopolitics play also a major role.

Let us first look at the demand and the supply: In general, oil demand depends on economic growth, whereby in the Western Industrialized countries demand is not rising as rapidly as consumer spending because of conservation efforts. Also, in the case of Japan demand has stagnated since 1994 because of its no growth environment. But, where demand for oil is exploding is in emerging economies - this especially in Asia.

Thus, crude oil demand in China has doubled since 1992 to 4.4 million barrels per day. Outside China ex Japan the situation is similar with demand having doubled to around 9 million barrels over the last 7 years. Because of this rapid rise in demand, today, Asia including Japan consumes almost as much crude oil as the US. But consider this: Asia has more than 3 billion people, whereas the US has only a population of 265 million.

In other words, while in the US per capita oil consumption is more than 24 barrels per year, in the case of emerging Asia it is less than 2 barrels. Therefore, if all the global healing apostles and all the Asian bulls are right, and the world really continues to grow, with Asia fully recovering, then oil demand is likely to explode over the next two years. I have lived in Asia since the early 1970s and one point is clear to me. With rising incomes, population growth, and increasing standards of living, people move from bicycles to small motorcycles, then to cars.

Moreover in homes and offices people use more and more energy guzzling appliances such as air-conditioners, de-humidifiers, refrigerators, heaters, washing machines etc. It is, therefore, my opinion that the 3 billion Asian could easily double their per capita consumption of oil over the next 10 years to around 4 barrels, which is the per capita consumption we find in Latin America.

But what about the supply side? Non-OPEC countries produce around 60% of the world's crude oil, but have only about 23% of proven reserves. Moreover, over the last ten years, non-OPEC countries' reserves have been declining and current output is at 100% of production capacity. Thus, although non-OPEC countries have 60% of current production, they cannot increase their production - neither now, nor within the next few years.

OPEC countries by comparison 'only' produce 40% of world's supplies, but they have close to 80% of world's proven reserves. Their ability to increase production is, however, at least in the short run, limited because they are running at 96% of production capacity. In addition, even if OPEC countries were willing to boost production to 100% of their capacity, their incremental production would amount to less than 2% of total world supplies, which in a strong global economy in 2001 could easily be absorbed by the market.

However, it is unlikely that OPEC has any desire to increase production at all for several reasons. Adjusted for inflation, the oil price is still down by about 50% from its 1980 high. The Arabs also know that, by keeping supplies tight, the price will inevitably rise, given the present strong demand and that US oil inventories are at a 24 years low.

In fact, if right now, one or several OPEC producers would just cut production by 1 million barrel per day, the price of oil would shoot up to $40, $50, and possibly even to $100 per barrel, because reduced supplies could lead to a buying panic and inventory building.