Didn't You Know #1

World running low on oil
Jul 10 2005 07:42:10:827PM

Kuwait City - Scarce spare output capacity and a lack of investment in refining coupled with unprecedented growth in global demand will combine to keep oil prices highly volatile for years to come, analysts said on Saturday.
"Volatility in the oil market is not the result of terror attacks, climatic conditions and security uncertainty only. It is more because of low spare capacity that has dropped sharply," Gulf oil analyst Hajjaj Bukhdour said.

Before 2004, worldwide spare capacity exceeded six million barrels per day (bpd) or 8% to 10% of global consumption. Currently, it is around 1.5 million bpd or just 2% of daily world demand, he said.

"In the coming years, spare capacity could drop to as low as 600 000 (under 1%) bpd. This is what is keeping the oil price under continuous pressure."

The problem is compounded by the doubts over the Opec cartel's ability to raise its production capacity to meet the growth in global demand. The International Energy Agency projects worldwide demand of 84.3 million barrels per day this year, an increase of 2.2% on 2004.

The agency stuck by that projection last month and called on Opec to increase its production capacity from the current 30 million bpd to 50 million bpd by 2020 to meet world demand.

But the Financial Times reported on Wednesday that senior Saudi energy officials had privately warned US and European counterparts that the cartel would have an "extremely difficult time" meeting that demand.

Opec kingpin Saudi Arabia calculates there is a 4.5 million bpd gap between what the world needs and what the kingdom can provide as it can boost its output to a maximum of 15 million bpd by 2020, the Financial Times said.

Opec's acting secretary general Adnan Shihab-Eldin said Opec expects that global oil demand will rise to around 111 million bpd by 2025 at an annual average growth rate of 1.5 million bpd. By then, Opec will meet 49% of world demand at 55 million bpd.

To raise output capacity and clear bottlenecks in the refining sector, oil-producing nations need to invest hundreds of billions of dollars over the next two decades.

According to an IEA estimate, $16 trillion in investment will be needed in the energy sector by 2030.

There had been hardly any investment in refineries in the past 25 years and in the Gulf Arab states, which produce 17 million bpd, not a single new refinery had been built since 1980.

Gulf Arab oil producers are expected to invest some $500bn in the oil industry over the next 15 years, some of it in the refining sector.

But former Kuwaiti oil executive Kamel al-Harami warned: "The market will continue to be highly volatile for many years to come unless huge investments are pumped into the industry, especially in raising output and refining capability."