The Saudi oil summit won’t help lower world oil prices, but for the first time in ages, producing and consuming nations are at least talking and starting to think seriously about the future. Yet despite the talks, the price of oil will be dictated by supply and demand and the econonomic and political stability of oil producing countries.
Firstly, the supply and demand for oil is very tight. Demand is still rising, even though it’s slowing. OPEC estimated in late May that oil demand would grow by 1.35% through the rest of this year: 10 days ago it cut its estimate to 1.28%.
Seeing the world consumes more than 85 million barrels a day, that’s an extra million barrels a day in demand over the rest of the year, despite the sluggish economies in US, Europe, Japan and other consuming countries like Australia and New Zealand.
The news from the meeting was the much leaked decision by Saudi Arabia to produce an extra 200,000 barrels a day from next week. That’s not enough to put pressure on prices: so there’s a shortfall, even if the likes of Kuwait manage a small increase.
The single most important move that can be done is to end the instability in Nigeria. It is currently pumping around 1.5 million barrels a day: a month ago it was up around 1.9 million barrels and its industry has a potential 2.5 million barrels a day capacity. Adding just half a million barrels a day extra from Nigeria would make a dent in world prices.
Nigerian production is at its lowest level for 25 years as the rebels slowly strangle the Delta oil industry. Critics of oil companies, speculators and the like conveniently miss this point.
But even before the Saudis can pump the extra oil into tankers, we have seen its extra production evaporate. Last week we saw Chevron halt production of 190,000 barrels a day because of attacks by rebel groups in the Niger Delta and Shell suspend production of 155,000 barrels a day from one of its fields for a similar reason.
That’s 345,000 fewer barrels a day; Saudi Arabia’s increase won’t have any impact if these cutbacks continue. And many people forget that Saudi Arabia promised to lift production by 300,000 barrels a day in May, and then added the 200,000 barrels on top of it.
So that half a million barrels, plus the extra oil from Nigeria, would be enough to pressure prices. But if Nigeria was producing at around 1.9 to 2 million barrels a day, would Saudi Arabia have decided on its 500,000 barrel boost? Doubt it.
Saudi Arabia says it will expand production capacity, noting that it expects to achieve 12.5m barrels a day by next year and could add an additional 2.5 million barrels a day — if needed — on top of that, but only after spending an estimated $US190 billion.