Opec will meet in Vienna, Austria, on 8 June 2011 for its 159th Ordinary Meeting. For the first time since December 2008, when the group set its production target at 24.85 million bpd, there is a genuine possibility that this figure may at last be set for an increase. Although purely speculative, reports indicate that an increase of between 500 000 bpd and 1.5 million bpd is on the cards. In reality, Opec members have been actively flouting production targets all along with an actual current production total, due to member ‘non-compliance’ of closer to 26.3 million bpd, in spite of Libya’s 1.4 million bpd of lost production. However, what is important is the apparent recognition, should an increase be confirmed, that Opec is awake to the spectre of demand destruction and the impact of consistently high oil prices on the recovering global economy.
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Whilst Brent crude prices have already dipped amidst the speculation, the impact of such a meagre increase would be symbolic rather than medicinal as demand for crude oil is forecast to escalate further during the second half of 2011. The same issues face key commodities across the spectrum be they oil, wheat or gold, in that there is a fundamental tension between falling supply and rising demand. Whether the cause is the unprecedented economic growth not just in China, but across many emerging Asian nations, the Fukushima nuclear crisis in Japan or the now extended period of unrest in the Middle East, the reality is that this type of price volatility is likely to become the norm rather than a temporary blip. The dual effects of a rising population and increasing economic development worldwide are placing intense pressure on an already creaking supply chain. The very fact that isolated weather events or political upheaval can impact commodity prices to quite such an extent as we have witnessed in recent months/years is a testament to how finely balanced the ‘system’ has become.
The oil and gas sector is a case in point with the market lurching from being comfortably supplied in early January to a sharp rise in oil prices from sub US$ 100 to US$ 125 in the space of a few weeks on the back of events in the Middle East. The effect has contributed in no small part to the rise in global inflation and the threat of an end to the global economic recovery as analysts forecast even greater prices hikes over the course of the next 12 months.
For Opec at its forthcoming meeting, the actual level of any increase in production, be it 1 million bpd or higher, is largely immaterial, as it will inevitably be quickly soaked up by global demand. What is important is that the cartel is seen to be reacting sympathetically to an escalation in the current price of crude oil. By showing intent to address rising oil prices its efforts will go some way to defusing the growing clamour from the renewable energy lobby intent on the substitution of fossil fuels with alternatives such as wind, solar and nuclear energy.
This month’s issue begins with an article by Contributing Editor, Gordon Cope that looks at the Arctic frontier as the largest remaining region of untapped oil and gas reserves and an effective illustration of how the industry is pushing back every conceivable barrier in its quest to meet future oil and gas demand.