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Crude oil prices set to ease but time frame uncertain

DUBAI — On average, oil prices in 2007 will be lower than 2006, making it the first year in four that the average oil price has fallen rather than risen, said a senior energy analyst at the Centre for Global Energy Studies, Julian Lee, in Dubai. "Assuming that the production projects come on stream we will see some easing [of prices] in the second quarter of 2007," though he refused to give specific prices.

Speaking at the 5th International Middle East Petrochemical Conference, Lee challenged the "new wisdom" that had emerged. This asserts that economies are now less dependent on oil and that high oil prices will not damage growth, that non-OPEC production has reached a plateau, and that prices were kept artificially low during the 1990s by OPEC's huge spare capacity, which will not return. This theory contrasts with conventional wisdom that holds that high prices will lead to a slowdown in demand growth and a surge of new supply once the effects of increased spending on exploration and development are felt.

Lee stressed the need to be wary of accepting this new wisdom without question. "Inflation is beginning to appear in developed economies and interest rates are rising. High oil prices and fears of future supply squeezes have stimulated research into alternative transport fuels and general energy sources — this is a one-way process. Non-OPEC's output is not resource constrained, but the result of a series of setbacks that may not persist year after year into the future," he said.

Before oil prices can fall, oil demand must slow sufficiently and stay low. This is starting to happen with oil demand slowing dramatically since 2004, he said. Non-OPEC oil supplies must also start picking up, which will start happening this year Lee predicts, reaching a peak in 2010. Supplies are expected to decline gradually thereafter. OPEC's spare capacity must also rise above five per cent of global oil demand. However, if the organisation's plans materialise, spare capacity should exceed eight per cent by 2008.

Refineries must also be able to produce enough low sulphur products, and Lee forecasts that this is likely to be achieved by the end of the decade. Between now and 2010 China, India and the Middle East will have 3.3 million barrels per day of new distillation capacity and 1.4 million barrels per day of hydrotreating capacity. Finally, the politics of oil must become less disturbing if oil prices are to fall. Iraq and Iran are major problem areas and unrest in Nigeria has worsened. However, this situation could improve at any time, or never, he said.

He concluded therefore that high oil prices could persist for sometime, but when the fall happens it could be a hard one.