DUBAI (Reuters) – Spare capacity in oil markets could weigh on the price for years to come, the chief economist at oil major BP said on Monday.
Lower inventories later this year would support the oil price, but the supply cushion would prevent a sharp rally even if the world economy returns to growth, BP’s Christof Ruhl told Reuters in an interview.
“Would that mean prices will shoot up again? I don’t think so,” Ruhl said ahead of an energy conference in Dubai.
“Even if we went back to the demand growth rates of the past few years, it would take 3 years to get back to a market that was as tight as last year. And global growth is unlikely to return to the stellar levels of the last few years.”
By the end of the year, spare capacity would reach 6 million barrels per day (bpd), Ruhl said, up from around 2.3 million bpd about a year ago.
It would be some time before demand would eat through capacity as future economic growth would likely be stymied by governments having to pay back the trillions of dollars that they have spent to get out of recession.
“At some point the bill will come. That will result in higher interest rates and higher taxes or a combination that has the potential to slow down the economy,” he said. “We could see something of a false economic dawn.”
The second half of 2009 should see oil above $50 a barrel if the economy stops contracting and OPEC maintains commitments to supply curbs, Ruhl said. Those curbs would soon start drawing down what are still high inventories, he added.
U.S. crude traded around $50 on Monday after sliding as low as $32.40 in December from a July high of over $147.
BP expected global oil demand to fall by 1.3-1.4 million barrels per day (bpd) this year, just over half the 2.4 million bpd fall expected by the Paris-based International Energy Agency (IEA).
Demand would continue to grow in the oil-exporting Middle East at just below 200,000 bpd on the year, Ruhl said. Producers were still receiving what was a historically high price at $50, he said.
“When we reached $50 on the way up in 2005, everybody partied,” he said. “Now on the downside everybody cries wolf. The difference between then and now is costs, which exploded.”
Costs would follow oil prices down but with a lag of around 18-24 months, he said.
“The prize will go to those who can adjust to this cost environment the fastest,” he said. “And that’s the problem all the oil majors are facing. How to drive cost deflation into the system. The way down is harder than the way up.”
Oil firms faced a tough balancing act to cut costs while ensuring they were investing enough to participate in any future upturn in demand, he said.
Ruhl declined to name a price that would fit BP’s investment needs and rubbished theories that either the cost of marginal oil dictated the value of a barrel, or that there was any such thing as a fair price.
The idea that the cost of marginal supply dictated the price relied on the assumption that producers progress smoothly from the cheapest to the most expensive oil wells. They do not, because governments in many producing countries limit access to their reserves, he said.
Top oil exporter Saudi Arabia last year named $75 as a fair price for both consumers and producers.
“There is no such thing as a fair price. There is only a price that balances demand and supply. From an economic perspective its a political price that has nothing to do with efficiency.”