The global oil industry has had to cope with significant challenges in 2012, mainly related to the ongoing risk of disruptions in oil supplies in the Gulf because of the Iranian nuclear crisis, and the possibility of Iran closing down the vital Strait of Hormuz. This is not to mention the devastation caused by Hurricane Sandy that hit the east coast of the United States, and the shortage of supplies which it caused to refineries and power plants in one of the world’s most energy-intensive regions.
The oil industry also had to deal with the risk of a decline in demand for oil, due to the global financial crisis. But interestingly, and despite the possibility of these challenges leading to rapid price rises or drops relative to the level desired by producers (around US$ 100 per barrel), oil prices stabilized within a reasonable range, between US$ 108 and 111 per barrel of Brent crude during most of 2012.
It will go on the record that 2012 was a crucial year in the history of the global oil industry, since it will change the perception of the principle of oil security, which has dominated the prevailing thinking among politicians and observers since the Arab oil embargo in 1973. For although the Iranian nuclear crisis has cast a shadow on the markets throughout the year, with weekly threats about closing the Strait of Hormuz, OPEC maintained its joint production policy. OPEC output thus remained around 30 million barrels per day, which is close to the agreed production ceiling for the year.
Price stability within a threshold of three dollars is due to the role of the major producing countries in the Gulf, especially Saudi Arabia, as well as the UAE and Kuwait, in tapping their spare productive capacities to prevent any shock to the global balance of supply and demand for oil.
This also highlights the credibility of these countries in the market at the level of their commitment to this responsibility, in addition to the market’s experience of these countries’ actual ability to access this spare capacity when needed. For this reason, markets have stabilized throughout the year, and avoided a major economic shock as a result of a potential rapid and very high increase in prices as was expected when Western countries imposed an economic embargo on Iranian oil exports, which led to a decline in the latter by about one million barrels per day. There were growing fears that any rapid and high increase in oil prices would coincide with the European sovereign debt crisis that remains extant, which would compound its negative repercussions on the global economy.
At the same time, oil-exporting countries feared that prices may collapse below the US$ 100 per barrel level, the price level adopted by some oil countries for their 2012 budgets. What made matters worse was the relative slowdown in China’s economic output, in addition to the crises unfolding in European Union nations and the United States. But it seems that ongoing fears from a possible military confrontation resulting from the Iranian nuclear crisis continued to dominate the markets, stabilizing prices within the US$ 108-111 level per barrel of Brent crude.
It is expected that most of the factors that impacted the markers in 2012 will continue to play out in 2013. For instance, it is likely that demand in European countries and the U.S. would continue to cool down. However, it is expected that the growth of the Chinese economy would improve, which has indeed started to happen recently, with forecasts expecting this to continue. This enhances the possibility of demand for oil stabilizing in 2013 at or higher than the 2012 levels.
At the same time, OPEC decided to maintain its production levels, while production from non-OPEC countries is stable and has been this year. To be sure, there has been a noticeable increase in U.S. output thanks to shale oil, although this was offset by decreased production in Brazil, Norway and Britain.
At the same time, it is expected that the Iranian nuclear crisis would continue to cast its shadow on the markets, especially if the Israeli right led by Benjamin Netanyahu wins the next Knesset elections, and despite all talk about secret U.S.-Iranian negotiations. Indeed, these negotiations are expected to be accompanied by difficult periods and Israeli pressures to thwart them, and all these factors will no doubt impact oil prices.
Yet despite these fears and possible price rises, 2012’s successful record of balancing supply and demand indicates that it may be possible to overcome statements threatening the closure of the Strait of Hormuz, especially with the availability of strategic stocks in industrialized countries that are sufficient for 60 – 90 days per each respective Member State of the International Energy Agency, not to mention the commercial inventories compiled by some producing countries near the major consumption areas in North America, Europe and Southeast Asia.
* Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)