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$100 oil by 2008? Maybe not

A stark warning by Canadian Economist Jeff Rubin about the expected decline in oil exports and possibility of a $100 per barrel crude oil by end of 2008 has caught the attention of the mainstream media in recent weeks. It has also been praised by the advocates of the Peak Oil theory who believe that global oil production has already peaked and is currently on a downtrend.

Yet a careful examination of Rubin’s analysis and his underlying assumptions about the oil market, raise some doubts about the accuracy of this prediction. Rubin has argued that the large increase in domestic consumption of crude oil by OPEC, Mexico and Russia will reduce their exports to 32.9 mb/d by 2010, which will be 2.6 mb/d smaller than 2006. He arrives at this projection by assuming that OPEC’s total output is near peak at 34.2 mb/d and it can increase by no more than 0.6 mb/d between now and 2010.

This is a gross underestimation which ignores the massive investments that OPEC countries have made in recent years to expand their production capacity. Based on recent studies by OPEC experts, the member states (and their international oil company partners) have allocated more than $120 billion to new capacity projects and the cartel’s production capacity will expand to 39.7 mb/d by end of 2010. Based on this projection, OPEC countries will be able to increase their crude export by 4mb/d even if their domestic consumption grows at the same speed that Rubin has predicted. This can clearly make up for the expected 1.5mb/d decline in Mexico’s crude exports.

Furthermore the capacity expansion is not limited to OPEC countries. The worldwide investment in oil and gas sector development has increased so rapidly in the past five years that energy investment companies have experienced severe shortages of equipment and skilled technicians. This massive global investment is likely to expand the production capacity outside of OPEC as well. Additional capacity is expected in Russia, the Caspian and, as noted by Mr. Rubin, in Canadian oil sand.

Rubin’s projections for the growth of domestic oil consumption in major oil exporting countries also deserve a careful examination. There is no doubt that subsidized price of refined products and rapid economic expansion, have contributed to a noticeable increase in domestic consumption in these countries in recent years. But the policy makers are well aware of how this trend is cutting into their oil exports and some are taking steps to reduce it. After experiencing more than 10% annual growth in demand for gasoline, Iran finally took action earlier this year and initiated gasoline rationing. Early data show that this policy has been successful in curbing consumption.

Currently Egypt and Syria are also moving in this direction by gradual reduction of their fuel price subsidies. Other oil-exporting countries are also likely to pay more attention to this issue in the coming years. Many Arab oil exporters are promoting the domestic consumption of natural gas as a substitute for refined oil products in order to make more oil available for export - with admittedly mixed success so far. In the longer-term the oil exporting members of the Gulf Cooperation Council are also looking at nuclear energy as an alternative to oil and have received encouragement from Western countries for this initiative.

It must also be kept in mind that a portion of domestic oil consumption by oil exporting countries is used for production of refined oil products which are used internally and exported. Hence while the oil that is refined internally is not available for export as crude oil, the portion of it that is exported as refined oil products will benefit the oil importers and reduce their need for crude oil. This is all the more important given that the high price of oil in recent years has shown a strong link with lack of refined product availability and further investment in refining capacity will help to resolve this bottleneck in the market. According to a 2006 study by OPEC and Wood McKenzie, a large amount of investment in new refineries is already underway and refining capacity of OPEC member states is projected to increase by 60% during 2006-2012.

The price of oil may well rise in the next three years and it might even reach the $100 per barrel for a brief period. But this will most likely be caused by strong global demand or an unexpected geo-political crisis in the Middle East rather than by a decline in exports under the circumstances that Jeff Rubin has described.

Nader Habibi is the Henry J Leir Chair in Economics of the Middle East at Brandeis University’s Crown Center for Middle East Studies.

Editorial Notes: Submitted by the author. According to a recent press release from Brandeis:
Nader Habibi, a respected Middle East economist who has taught at universities in Iran, Turkey and the United States and served as a regional economist at a major international forecasting company, was appointed the first Henry J. Leir Chair in the Economics of the Middle East at Brandeis University.
For more on the arguments which Nader Habibi is contesting, see Export Land Model (ELM) goes mainstream at Energy Bulletin. These arguments attracted widespread attention when Jeff Rubin made them recently, but Jeffrey J. Brown has been writing about them for several years at peak oil websites. -BA

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