The US economy and the American dollar influence on oil prices
Publications regarding crude oil inventories in the USA and China, the main petroleum consumers, have the strongest impact on the oil price in the short term. Oil reserves reduction in the USA and China suggests that these countries, as well as some other countries of the world, are getting over recession. Reports of the Electronic Industry Association (EIA) do not make oil producers happy announcing about rich petroleum reserves.
One more factor pushing oil quotes up is dependence of the world commodity market on the foreign exchange markets. Just like gold, petroleum will go up in price when the US Dollar is weakening against the euro and other major world currencies.
Oil extraction volume
During the last ten years, oil demand has been rising at the average annual speed of 1.6%. Oil output decrease is discussed as little as possible. However, there is much to think about. During the last years oil extraction has been decreasing in the USA, Mexico, Norway and Great Britain. These countries have passed the peak of oil extraction, therefore a downward tendency will intensify every year. Meanwhile, according to BP World Energy Outlook 2008, they account for 17% of world oil extraction. The most dangerous situation is in Norway and Mexico, where in 2007 oil output shrank 7,7% and 5.5% respectively. In 2009 Russia producing 12.6% of world oil will join these countries. The geological search for new oil fields in Eastern Siberia is already frozen. Efficiency of oil deposits search and exploitation is currently close to zero. This situation will persist until a barrel comes to cost $60-70.
So, next year five major oil production companies will cut crude oil supplies. If oil extraction in Russia, the USA, Mexico, Norway and Great Britain contracts 1%, and the OPEC slashes its output by 12% as promised (or even 10%), then global oil production will dwindle by 4.5-5% (provided other countries keep extracting oil at the same pace).
This fall in oil output is comparable to the 1973 Oil Embargo crisis, when some Arab members of the OPEC decided to stop supplying oil to the countries which supported Israel in the October War. It should be reminded that global oil production decreased 4-5%, and the price for a barrel rose from $3 to $9. However, the difference in reduction of oil production at that time and now is dictated by completely different factors. Oil consumption in 1973 was growing, now it is falling. Reduction in 1973 was provoked by military and political crises, now it is provoked by absolutely logical economical reasons. That is why waiting of an increase in the oil price is pointless. It is also useless to recall the 1978 Oil Embargo when Iranian developments pressed oil output down, though, unlike in 1973, it coincided with industrial boom in the USA. At that time the oil price went up from $40 to $110.
Under the conditions of the ongoing crisis, oil supply may deccelerate faster than demand backed by developing markets. Moreover, the EIA has already announced that in 2011 the world risks to face an energy disaster because of insufficient oil supply. The logic of the EIA is simple: boosting oil production requires investing $360 billion. Due to the financial crisis and low prices for crude oil, companies will rather reduce investments, which can potentially lead to an abrupt fall in oil output. Oil demand will be reinstated, but not oil output, as companies will not invest at an appropriate time. This will result in demand exceding supply. Moreover, it should be taken into consideration that the oil price depends on the oil production cost. The era of cheap oil ended, the cost of oil extraction rises year after year. The average cost of oil production varies from $4 to $7 per barrel in traditional regions of extraction, for instance, in Russia. The cost of deep-water oil extraction is $20-40 per barrel. Adding to this cost transportation expenses and other extra costs, we realize that the oil price which producers can be happy with (and which allows enhancing production in future) is $60 per barrel. Low prices threatened new projects of oil production in regions difficult to access.
Oil future
In 2009 oil prices can return to a rising tendency which was observed in 1998. It means that oil quotes will move back to the range of $40-80 per barrel. In the first half of the year the market will not get rid of speculators’ influence, that is why oil prices might stay in the diapason of $40-50 per barrel. However, the oil price may temporarily fall to $20-25 per barrel. In the second half of 2009 the market will witness decreasing oil delivery. The global economy will probably start to recover after the 2008 autumn shock. Everyone will recognize that many assets had been oversold in panic. Oil supply deficit will intensify in the second half of the year. It can move oil prices to a diapason of $50-70. So, the average oil price is forecasted to be approximately $60 in 2009. The target oil price for the end of the year is $65 per barrel. However, all predictions are about future, and a lot can happen between now and then. It is hard to tell how successful Obama's plan will turn out to be, how stable the US Dollar will be and if a new round of recession will overwhelm the world economy. However, the governments of many oil-producing countries are already reconsidering the budget and budgetary oil price adjusting them for a pessimistic forecast.
