The International Energy Agency is a Paris-based organisation that provides the world with independent advice on the oil market. Alan Kohler spoke to the IEA’s principal oil analyst Antoine Halff about the spike in oil prices. [Real Dialup][Win Dialup]
ALAN KOHLER: In the past two weeks the oil price has charged up to nearly $50 a barrel and then just as quickly slumped again. The world is left wondering whether this was a short-term aberration – a speculators panic caused by a few once-offs or a harbinger of things to come – as global demand fundamentally begins to outstrip supply. The organisation with the job of making sense of all the confusing signals and providing the world with independent advice on the oil market is the Paris-based International Energy Agency. I spoke to the IEA’s principal oil analyst, Antoine Halff.
ALAN KOHLER: Antoine Halff, just a few days ago the oil price was over $48. Many said it was heading for $50, is that episode finished now do you think or will we see another surge back towards $50 in the near future?
ANTOINE HALFF: Fundamentally, things have not really changed. I mean, the main factor that happened since the high of last week is that Iraqi exports restarted both in the south and in the north. But since then, we’ve had another attack on some of the pipeline facilities, and obviously the situation in Iraq will remain quite volatile for sometime.
ALAN KOHLER: What do you think that run up in the price was all about? I mean, was that just a short-term panic or a sign of things to come?
ANTOINE HALFF: I think, the run up in prices really reflects concerns about the lack of spare capacity. If you look at the classical, the fundamentals, in the classic sense of the word – supply and demand. Well, demand has been rising extremely fast, but supply is quite plentiful as well. You know, there’s no lack of crude on offer in the market. But what I think concerns the market is the sense that spare capacity is extremely tight, at a record low at a time, when demand is still extremely strong and there’s concerns about potential supply disruptions in a variety of producer countries – from Iraq to Venezuela to Nigeria.
ALAN KOHLER: OPEC said recently there was about a $16 a barrel premium in the price for Yukos, Iraq and Venezuela and that the more normal level is around $30. Firstly, do you agree with that and could you also provide a bit of an assessment of those three situations?
ANTOINE HALFF: I’m not sure I would try to put a number on what exactly the premium is. Yes, there is a premium, due to the risks to supply but that risk to supply is important to the market precisely because capacity is tight. And capacity is not a psychological factor – it’s a fundamental of a kind. This being said, I think Russia – there’s been concerns about Yukos. Those concerns are not completely removed, but there’s been some positive signs – some positive signals sent both by the Russian government and by Yukos itself. Now, the other concerns are Venezuela. Obviously, there’s been a referendum there that maintained the government in control, but I don’t think it’s ended the divisiveness of the political debate in the country, so it remains a fairly tense situation. And Iraq – the positive thing is that the government really has become extremely good at responding to pipeline attacks, at putting oil back flowing through the pipelines. But, at the same time, the conditions that create the attacks and the general instability of the country is obviously not going away right now. So, those concerns are – there’s no disruption at the moment, there’s plenty of oil, but the concerns about the potential for disruptions will stay with us for sometime.
ALAN KOHLER: Do you think that the situation has been worsened by OPEC’s failure to be consistent with its messages? They seem to say one thing one day and another thing the next day about what they can and will be doing in terms of production?
ANTOINE HALFF: Well, I think OPEC has, in a way, lost control of the market for a little bit, and I think that they are generally determined to try to bring prices down – it’s in their interests to do so. High prices hurt the economy, high prices hurt demand ultimately and hurt the market. So I think, OPEC producers will try to push up demand, push up production. Right now, there’s not that much they can do in the very short-term because I sense that they’re pretty maxed out, they’re pretty much at capacity. But on a positive note they are working hard to expect capacity and we are expecting large capacity increases between now and the end of the year, and again next year.
ALAN KOHLER: Now, the IEA if forecasting global demand to be about 84 million barrels a day next year, I think, but you also admit in the latest report that demand from China is accelerating and the outlook for its economy is quite unclear. Now, how certain can you be about the demand forecast?
ANTOINE HALFF: Well, we can’t. It’s been a major factor of uncertainty. But it’s not accelerating at the moment. It seems that it’s slowing down a bit. The latest numbers for July, released by the Chinese government, show extremely strong growth, but not quite as extreme as in June or in May, so there seems to be a bit of a slow down. But, of course, there remains concerns about the very integrity and reliability of the numbers put out by the Chinese government.
ALAN KOHLER: And just turning to supply. Why do you think the Saudi Arabian production is declining at the moment?
ANTOINE HALFF: Well, we don’t think it’s declining at the moment. Saudi production has been subject to deliberate production restraint measures, when the government tried to push up prices initially. But there’s lots of potential. What we feel is that the spare capacity in Saudi Arabia has pretty much thinned out to very low levels and this is because, probably just because the investments haven’t been put in to maintain spare capacity, which has become fairly costly to do. But hopefully, capacity will rebound a bit.
ALAN KOHLER: Is there any sign that the big oilfields, including those in Saudi Arabia like Ghawar, are now or soon will be in long-term decline? That they’ve peaked?
ANTOINE HALFF: I wouldn’t say that, but it’s quite clear that oil fields eventually are going to decline. I mean oilfields are subjected to decline rates after a point. The thing about Saudi Arabia is there’s a lack of evidence, a lack of transparency. But the good thing about the debate that was launched recently about the extent of Saudi reserves and Saudi production issues is that hopefully we’ll have a lot more details, a lot more transparency going forward, which will help the market assess what the situation in that market and that country really is.
ALAN KOHLER: Do you think that if more super-giant oil fields are not discovered soon and Saudi Arabia, in particular, invests that the world will have to get used to higher oil prices, around the $50 level, possibly even more?
ANTOINE HALFF: Well, we’re not there yet, but there’s a widespread sense in the market that fundamentals have shifted, and we’re now in an era of higher oil prices for the sustainable future. I think there’s probably a lot to say for that theory. At the same time, even though on average prices will probably be higher in the future than they’ve been in the last 10 or 15 years, there’s still potential for short-term drops in prices. It’s not going to be a straight curve-up or a plateau. It’s never been in the oil market, and there’s no reason to believe it’s going to be in the future.
ALAN KOHLER: But it is true that there hasn’t been a super-giant oil field discovered for a while now. I suppose, well, do you think there needs to be a discovery of that size?
ANTOINE HALFF: Yeah, well part of the problem is geology, but part of the problem is just investments – and it is also the fiscal climate, and the fiscal environment in some of the producing countries. So it’s not that there’s a lack of oil out there. It’s just, at the moment, a tightness in production. But the oil is there to be extracted.
ALAN KOHLER: Do you have an opinion, finally, about Australia’s ability to remain self-sufficient in oil?
ANTOINE HALFF: Well, I think, all countries are becoming aware that they have to, not only maintain supplies and security of supplies and extend their oil production base, but they also have to rein in consumption. And I’m sure the Australian government, as other governments, are tackling the issue on both fronts and looking forward. I think the lesson of the high prices that we’ve had is that, I believe, we’ve become more aware of the scarcity of oil resources and there will be a new momentum towards efficiency gains, fuel diversification, and energy savings in general.
ALAN KOHLER: So maybe a high oil price is good for us?
ANTOINE HALFF: You might say so. You might say it’s not so bad for consumers in the long run. It hurts in the short-term, but eventually it teaches us a lesson. And there’s certainly some benefits to gain from it.
ALAN KOHLER: We’ll leave it there. Thanks very much Antoine Halff.
ANTOINE HALFF: You’re welcome, my pleasure.
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