Higher oil prices here to stay (page 1 of 4)

Relative to world oil demand forecasts of late 2002 and the first quarter of 2003 the demand picture has consistently firmed up with growth rates of consumption rising, or staying very firm in all major markets.

Optimism by consumer country energy agencies on how much oil can be exported by Iraq has now given way to more realistic, lower estimates, as the 'Baghdad Bounce' upwards in oil prices continues. Apart from OPEC's Saudi Arabia, only Russia could raise export offer sufficiently and fast enough to create any serious potential of oil prices falling to less than $25-per-barrel.

In a sure sign of rising oil prices, consumer country media and opinion formers have returned to calling oil exporters "greedy" and solely targeting maximized prices, while leaders of oil importer and consumer nations set economic, energy and geopolitical policies to obtain the lowest possible price. This is because of the pervasive, but laughably false myth that "High oil prices hurt economic growth".

The oil price collapse of 1985-86 and low relative prices through to 1999 have had no beneficial impact on economic trends for the OECD countries in particular. Average yearly economic growth rates for the leading G-7 countries fell by the massive amount of 50% through 1986-96 compared with their annual performance in the previous 10-year period. In that earlier period, of 1976-86, oil prices were much higher, often averaging $50/bbl in today's dollars.

Recent oil market trends, impacted on the sentiment side by declining expectations for breakthroughs in cheap oil supply from Iraq, by low inventories and rising demand, and by a fragile outlook for slowing the depletion rate of oil output by OECD producers, indicate that strong or even runaway upward bidding in oil prices could occur.

Faced by the resolve of OPEC to not break ranks, for the moment, little can in fact hamper or prevent oil prices being moved up to a new target price range. This range could reasonably be $36-$45/barrel. Firm and stable oil prices in this price range could well stabilize and strengthen oil industry investment and planning for an emerging supply environment that will become increasingly tight, barring an intense and global economic recession - which would require oil prices far beyond $75/barrel to trigger.

The levering up of growth rates for oil consumption, through improving economic performance can at least partly, and not ironically be explained by rising oil prices.

From their low around $10/bbl in late 1998/early 1999, to prices in a sometimes erratic band from $26-$36/bbl since 1999-2000, the impact of higher oil prices on world macroeconomic trends and notably on relative pricing terms between real resources, on one hand, and manufactured goods and services on the other, is on balance pro-growth.

This applies at the world economy level, and despite OECD regional recession trends in some economies (official recession in Italy, France and Germany). The relatively low real interest rates now available to many borrowers is a complementing economic growth factor. Another is increased world liquidity simply due to higher oil payments.

Recent OECD IEA and US EIA data suggest that world demand is around 77.9 to 78.4 Mbd on an all liquids base: data supplied by the IEA in its July 11, 2003 'Oil Market Report' indicates Summer 2003 world oil demand averaging 78.08 Mbd, and recent OPEC estimates place world demand at between 77.45 Mbd and 78.57 Mbd.

Relative to 2002 quarterly averages we are confronted by what BP Amoco in the Introduction to its Statistical Review of World Energy, 2003 edition, calls "surprising growth".