High oil prices are the new status quo

If Opec leaders could command a lower oil price then they would do so but they appear powerless to move the market. Most now worry that consumer nations are going to be forced into a recession that will lower demand and therefore bring lower oil prices.

However, the strong global economic recovery in the first half of 2004, and the arrival of China as a major new consumer nation, paints a very different picture. China has boosted its consumption of oil by a thumping 20% this year, or 800,000 barrels per day and its many new car owners have known nothing but high fuel prices.

Now it may be that after the US election is out of the way that a more sober economic policy of higher taxes and more normal interest rates will dampen the economy. This would have a knock-on effect in Asia and Europe. Hence the very highest oil prices could be off the agenda.

However, the International Energy Agency has now revised its 2005 estimates for the average price of Brent crude to $35 per barrel which compares with $28 per barrel as recently as last year. Aside from demand are the problems on the supply side that seem to multiply.

Away from the Middle East there are supply risks from disruption in Russia, Venezuela, Nigeria and Indonesia. Iraq still seems a long way from controlling ongoing security issues and capacity could be shut off at anytime. Even Saudi oil capacity could be hit by a terrorist attack, although defense arrangements make this unlikely.

What is clearly needed is huge investment in additional oil production capacity, and yet only Abu Dhabi is quietly getting on with it. Other oil investment plans remain on the drawing board rather than actually getting under way. Eventually massive oil revenues and high prices will cause a change of heart but there is no sign of it just yet.

In the meantime, AME Info predicted $50 a barrel earlier in this year in this column, and the balance of probabilities must be that this price level will be tested again before much longer. All it takes is for one or more supply side factors to fail, or global economic growth to exceed expectations, or both.