Oil price reaches all-time inflation adjusted high as production declines

Oil price reaches all-time inflation adjusted high as production declines | Jet fuel, oil, IATA, ATA
Tue 11 Mar 2008 - The price of oil in New York last week passed the all-time, inflation-adjusted peak of $103.76 per barrel set in April 1980. By yesterday, the price had climbed to $109. Although the global economy is slowing and the demand for gasoline is dropping in the US, why does the price keep rising?
Economists are pointing to investors losing confidence in the money markets, lower US interest rates and the declining dollar, and instead are looking to commodities like oil to boost returns. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe. The dollar recently dropped to a record $1.5274 against the euro and a falling dollar tends to buoy oil prices in part because consumers using stronger currencies, like the euro, can afford to pay more per barrel in dollars.
Alongside, world production of crude oil has fallen from 73.8 million barrels per day in 2005 to 73.2 million barrels per day in the first eleven months of 2007, according to the US Energy Information Administration. Production last year declined in some of the world’s largest oil-producing countries including Indonesia, Mexico, Norway, Nigeria, Saudi Arabia, Venezuela and the UK.
At an OPEC conference last week, it was agreed to maintain oil production levels at current levels even though the organization believed the market to be well-supplied, with current commercial oil stocks standing above their five-year average.
Oil companies are pessimistic that oil and gas production can keep up with demand in the longer term, with Shell predicting supply problems will arise after 2015, when world production is expected to peak at 100 million barrels a day. The debate within the industry is how fast existing fields are actually declining, and how fast and economically oil companies can get new finds to replace that output.
Deutsche Bank oil analysts say that supply constraints could push the price of oil to $150 a barrel as early as 2010. The big question will be whether prices at that level will finally lead to a sharp break in demand, something that $100-a-barrel oil has yet to do.
The bank bases its gloom on how much harder it is for oil producers to make up the difference for slumping production in ageing fields. For the last 36 years the world has managed to add, on average, around 4.2 million barrels a day to annual supplies. But with a conservative 5% decline rate in existing fields, that figure will have to rise to over 7 million barrels a day to get to 100 million barrels a day – a level “that has never been achieved,” it reports.
According to IATA’s Jet Fuel Price Monitor, the price of jet fuel last week stood at around $130.30 per barrel, or $3.10 per gallon, a near-68% increase on a year ago and up 24.2% in just one month. Last year, IATA estimates the industry consumed 66.8 billion gallons of jet fuel costing around $135 billion.
Of that, airlines in the US consumed 19.59 billion gallons of jet fuel costing $41.17 billion in 2007, reports the Air Transport Association of America (ATA). However, US airlines have been gradually reducing overall consumption over the past four years. Indeed, the 2007 figure is actually lower than those seen pre-9/11.
IATA predicts that at an average fuel price of $114.20 per barrel, this will add a further $47 billion to the world’s airline industry costs in 2008. Given that the organization forecasts the industry achieved an operating profit of around $16.3 billion and $5.6 billion in overall net profit in 2007, the impact of a sustained increase in world fuel prices is certain to be severe.



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