By Raymond M. Wright, ContributorTHE OIL market has been historically unstable and especially so in the past thirty years. The most negative characteristic of an unstable market is price volatility. Neither national economies, exporters, refiners or consumers like prices that fluctuate wildly except perhaps the addicted gambler, and few if any of them flourish over the long term.
The oil embargoes of 1973 and 1979 demonstrated the dangers of oil dependence. Driven by an imbalance in world energy production and consumption patterns, crude oil prices rose substantially and have been particularly volatile since then.
Price volatility can be an even worse discomfort than prices that settle for long periods at levels considered unduly low or high. Indeed, in a situation of constant instability how can the market function effectively?
Table 1 gives the OPEC Spot Reference prices for the last ten years.
OPEC Spot Reference Basket Prices Since 1992 (US$/barrel)
$
1992 18.62
1993 16.33
1994 15.53
1995 16.86
1996 20.29
1997 18.68
1998 12.28
1999 17.47
2000 27.60
2001 20.95 (approx)
The events of the second half of the 1990's make an interesting story, with the average annual price exceeding $20/barrel in 1996 before collapsing to just over $12/barrel two years later. Since then, the annual averages have been $17/barrel in 1999, $28/barrel in 2000 and below $21/barrel in 2001, due in large measure to the September 11 incident.
In the financial year 2000/2001 Jamaica spent US$688 million on imported petroleum. In the present financial year, with lower prices, the import figure could be as low as US$460 million - a local blessing.
Crude oil accounts for about 40 per cent of the world's commercial energy supply and is predicted to retain roughly this share for the next two decades, as the global economy continues to expand. Consequently, there is a desire to gain and sustain stability in the international oil market.
ADJUSTING OUTPUT LEVELS
In the first half of 2001 there was a shortage of refined products in the US markets. This resulted from a drop in the number of refineries in that country, from 324 in 1981 to 165 in 2001. Many smaller refineries had closed, so refining capacity declined from 19 million barrels/day to 16.5 million barrels/day at present.
Meanwhile, in Europe the most striking feature facing consumers concerns taxation on petroleum products. An average of around 67 per cent of the final product price paid by European consumers goes to taxes. The result of this high tax regime was a series of protests in 2000 that brought the UK and France close to a standstill for three days. The Jamaican tax regime is just over half of the European average, resulting in considerably lower petroleum prices in Jamaica.
Another important element affecting prices is high shipping costs. About 40 per cent of the international tanker fleet is obsolete and its replacement is costly. This is because current environmental regulations require every new tanker to be double-hulled.
Also, speculation on the futures market affects prices, with part of the large excess capital presently available chasing this type of transaction. Volume traded on the futures market can sometimes reach as much as 150 million barrels/day of oil, which is about double the world's daily demand. Speculation can distort prices by up to $2/barrel either way.
WHAT TO DO
Oil will continue to be the dominant energy resource for the next 20 years.
Oil demand may rise from 76 million barrels/day in 2001 to about 89 million barrels/day in 2010. OPEC may produce about 38 million barrels/day of crude oil in 2010, representing 42 per cent of global supply.
OPEC countries presently have about 75 per cent of the world's oil reserves and there will be need for new investment in exploration and production in the future.
The new investment in upstream activities is important in both OPEC and non-OPEC producing countries. New investments seek comfort in stable prices. Unstable markets and fluctuating prices are not in anyone's interest.
Shifting regional and bilateral relationships, both in the crude and product markets, will be a driver for changes and will influence both government and industry responses. In the crude oil market, OPEC policies will remain as the main driver.
Turning to refined products, the refining industry will need to continually invest to produce the cleaner products that consumers now demand. Refining will therefore continue to be a highly competitive business, requiring high performance levels and astute business decisions.
As an oil-deficient country Jamaica has to realise that it must maximize its use of domestic renewable energy resources. Our energy future hinges in part on whether we have the will to translate our convictions and policies into the realisation of practical objectives.
Raymond Wright is Group managing director of the Petroleum Corporation of Jamaica. He can be contacted at raymond.wright@pcj.com
