Interview: High Oil Prices Are Here to Stay

Interview: High Oil Prices Are Here to Stay

Basim Al-Ahmadi, co-founder of GRI, sat down with Oskar Slingerland, who was an oil industry executive for 25 years and who has worked in all oil sectors from crude supply to refining and marketing, to get his take on the current situation.

There has been a lot of market anxiety over the recent surge in oil prices. Crude oil prices have hit a two-year high. Many believe this is because of traders’ fears over the recent talk of potential U.S. intervention in Syria.

Q: Do you believe this oil price surge has anything to do with the Syrian crisis?

A: A lot of people think that current high prices already take into account the possible military intervention in Syria. That is only partly true. It is correct that, upon the news of the possible intervention, the markets moved a couple of dollars. But with prices already at the level of $110 per barrel, this change was nothing major.

The real issue at the moment is much more related to the supply-demand balance—as a result of other factors. First, we are very close to the maximum utilization rate of world oil production capacity. The utilization rate is the percentage of technical capacity in place to pump oil into the markets. Contrary to popular belief, OPEC has effectively no substantial spare capacity.

Saudi Arabia, which has been the big spare capacity holder in the past, is virtually pumping at maximum capacity (despite what they might claim). The only real spare capacity still available is in the most troubled countries, such as Iraq and Libya. The latter has seen its production collapse under strikes and chaos because the government totally lacks control of the country. Iraq, meanwhile, is struggling to get its capacity up because of continued structural problems. It is thus unsure what spare capacity these countries effectively have.

There is probably also some spare capacity in Iran as a result of the international community’s boycott of this country. Exact numbers are difficult to verify, however, with reports coming out of transshipments into other vessels, which makes counting real export figures a challenge. Given that all three of these problem areas are far from being resolved, the market cannot rely on the spare capacity of these countries. This, as a whole, is why we are at the current level of utilization.

Q: Will oil prices go up or down as the likelihood of a US-led strike increases or diminishes?

A: There is always the sentimental reaction of a market to political changes or events like military intervention. Usually it is a yoyo effect. If the event results in a rapid move up, the market will quickly go back down and vice versa. This can take place within a day, which we saw illustrated during the first military intervention in Iraq in 1991. Prices shot up in the night but closed much lower before the day was over. Eventually a market will settle at a level that has some fundamental sense. So what could fundamentally change with a military attack that would influence the supply and demand balance?

In my view, little. First, look at the oil production capacity of Syria. It does not represent much. Any drop of production lost so far has probably been compensated by a drop in demand locally since the conflict is paralyzing the economy. A military intervention would not be able to change much about the supply and demand situation. That does not mean that any intervention is not motivated by energy. There is a strategic issue of gas pipeline projects from the Gulf to the Mediterranean. In this respect, Qatar might wish to increase its influence in Syria, which could explain its support for rebel groups.

Q: If the nature of the Syrian crisis is not the best indicator for oil prices, what factor(s) is/are shaping the nature of oil prices these days?

A: As I explained before, we are facing a tight situation in terms of the utilization rate of production capacity. So, Syria aside, we are already in big enough trouble. The world continues to consume more and more, while existing capacity is in decline. There is barely sufficient new capacity coming on-stream to compensate for the decline.

Many people wrongly believe that shale oil and gas are the solution. Proponents of this suggest that oil and shale gas are so abundant that, without tensions in Middle Eastern countries, prices would be much lower. Nothing is further from reality. In fact, the cost of sizable shale oil production is higher than the current oil price level.

And production levels for shale can only be sustained by continuous drilling because—unlike conventional oil fields, where decline rates are less than 10 percent per annum—shale oil decline rates are around 70 percent per annum. Many shale producers are therefore running into problems at the moment and are suffocating under a huge debt burden that, even with current oil prices, they have difficulty repaying. So shale oil and gas will not bring prices down. The development of shale oil and gas has moved us into a new era: an era of high energy prices.


About Author

Basim Al-Ahmadi

Basim was previously the Editor of Bonds & Loans, an expert publication on Emerging Debt Capital Markets. He forged partnerships with the world’s most reputable investment banks, asset management firms and corporations. Basim achieved a First Class Honours in Politics with International Relations from the University of York. He subsequently obtained his Masters in International History from the London School of Economics (LSE). At LSE he was the President and co-founder of the LSE Political Risk & Investment Society. In his free time, Basim is an avid reader of US Presidential History.