Thursday, July 7, 2011

The End of Low Oil Price (?)

By: Gamil Abdullah
Article from PETROMINER No. 06/June 15, 2011, pp 58-59

At present the chaotic situation in the North African and Middle East countries has become hot news of the in-ternational mass media. A strong wind is blowing in these Arab countries. It started in Tunisia, creeping to Egypt, Yemen, Iran, Libya, Bahrain, Jordan and Syria. In Tunisia and Egypt people power had successfully overthrown the heads of their governments from their power. The people of the Arab countries seem to have had enough of the repres-sive autocratic style of governance and unrighteous toward their people. One can learn that once people power has moved massively and continuously, nothing could stop it.

Let’s flash back to happenings in 2008:

• The soaring price of energy in the middle of 2008 (oil price happened to touch the level of US$147/bbl), and then followed by the collapse of world economy, primarily in developed countries whose economic movement depended on the capital market sector. Subsequently the price of oil kept declining and happened to reach below US$40 /bbl in the first half of 2009.

• After the first half of 2009, signs of the beginning of world economic restoration were beginning to be noticeable. Capital markets at the financial centers of the world were beginning to be enthusiastic. At the time the world price of oil was in the ranges between US$60-70 per barrel. In countries that relied upon the real sector in their economic transactions the signs toward eco-nomic restoration were noticed even earlier.

• China and India—preceded by China—continued to grow into two new economic giants of the world, followed by other big coun-tries such as Russia and Brazil. These new economic giants will ‘hunger for energy’ to balance the economic growth, activate industry and develop infrastructures in their countries.

How to elucidate the four phenomena mentioned above? First, the decline in oil price that simultaneously followed by the global financial crisis had given rise to the drop in investment in the oil sector globally. The drop in investment also means the drop in exploration and the minimal technology innovation for searching new reserve sources.

Secondly, by the time the global economy had fully recovered, the world demand for energy would rise again. However, due to the listless investment in the oil and gas sector post 2008 crisis, the rising back of demand for oil was unable to be equalized with the rise in supply—at least in the near future. It means that theoretically according to the law of supply and demand, the world will again face a situation where the price of oil will creep up again. It is observed from the price of oil that is although fluctuating, the trend is that it keeps on climbing. It started from the US$60-70 range, US$70-80 and to US$80-90 per barrel until year 2010.

How will the trend be in 2011 until several years to come? Observers opine that the disturbed political stability and security in Middle East and North African countries that store the majority of world oil reserves will continue to affect the world oil price, meaning that it will contribute to the continuous soaring price of oil. Furthermore, OPEC member countries are mostly located in the Middle East and North African regions. At present OPEC itself supplies around 35 percent of the world oil demand (OPEC World Oil Outlook 2010).

As seen in the price of oil the type of Light Sweet at NYMEX (New York Mercantile Exchange) on 8 April 2011 was closed at the level of US$112.79 per barrel, while that of ICE Brent was closed at the level of US$126.65 per barrel. Indonesia’s crude oil price known as ICP (Indonesia Crude Oil Price) if it is observed in the website of the EMR Ministry it was at the level of US$113.07 per barrel for ICP on the average (from all oil fields in Indonesia) in March 2011, up from US$103.31 in February 2011. On 7 April 2011 OPEC Daily Basket was at US$117.65 per barrel.

Developed countries grouped in OECD or European Union is extremely relying upon the Middle East and North African countries in meeting their need for oil. Until today, oil has been dominating the world energy mix and is still the prima donna of energy unmatched by other types of energy sources. There fore, the price of oil does not often follow the law of supply and demand in the economic science, but more often determined by the market euphoria— namely very sensitive toward matters of psychological nature rather than technical. Thus, the disturbed stability in the Middle East and the North African countries is predicted to provoke the price of oil to keep perching on the high level; until when and how high? It depends on the wind of change that will blow in the Middle East and North African countries, particularly whether or not oil supply will be smooth.

The conclusion from the various happenings in the past two years if it is linked to the price of oil is that, the price of oil will remain fluctuating, but at the high level.

What is the effect of oil price on Indonesia? Indonesia, who since 2004 had been a net oil importer and practic-ing the policy of energy subsidy since a long time ago has indeed a positioned to be wrong in every way. If the price of oil drops certainly the state revenues from oil & gas will also drop followed by vari-ous decreases in other investments in the upstream oil & gags business activities. If the price of oil rises, subsidy expenditures (especially for oil fuel) will swell; a pressure on the state budget.

One thing worthy of note is that so far in has been observed that in Indonesia undertaking of energy sources other than fossil energy is felt to be marching time. Preferably, other energy such as new and renewable energy should not be called ‘alternative energy’ but ‘compulsory energy’. It means it’s a must to develop and materialize immediately to reduce dependence on petroleum. The reality in the field, however, it is difficult for the various components of the nation to synergize, whereas, an advanced nation is a cohesive nation.

Disclaimer: The article is the writer’s sole opinion. Not intended to reflect any opinion or policy of the agency where the writer works for.

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