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Are Prices Too High?

pic of JPT Editor John DonnellyRepresentatives from the world’s largest oil consuming and producing countries met recently in Kuwait to discuss and debate issues of future energy supply and energy security. The question that dominated the meeting was: Are oil prices too high?

Neither side advocated trying to set a fixed price for a barrel of oil, or even a price range, but both sides expressed concern that current prices might not adequately represent the state of supply and demand, and that high oil prices could cause a recession, hurting oil producers in the long run even though they would reap short-term gain.

The 13th International Energy Forum brought together member nations of OPEC and the International Energy Agency as well as other oil producing and consuming countries. The gathering is the largest forum for energy consuming and producing nations around the globe, and the 88 member nations account for approximately 90% of worldwide oil and gas consumption and production. The group was formed in the wake of the Gulf War in 1991 as a mechanism to foster greater cooperation and energy stability. The forum has been under a brighter spotlight recently because of the oil price volatility of the past several years and because of concerns about whether the world will have adequate energy supplies in the future.

At the meeting, both producers and consumers acknowledged that oil prices are largely beyond their control. Several oil ministers claimed that oil was currently about USD 20/bbl higher than the global supply/demand balance warrants, driven by geopolitical events in the Middle East and “speculation.” Major producers said oil prices had risen about 17% since the beginning of the year and that the OPEC basket, a weighted average of OPEC members’ crude, was USD 16/bbl short of its all-time high reached in 2008.

Although the US and other major consuming nations advocated bringing more supply to the market to dampen prices and avoid the risk of recession, Saudi Arabia’s Oil Minister Ali Al-Naimi said the current market was “reasonably balanced.” He pledged that Saudi Arabia could make up for any shortfalls in production if geopolitical events took some supply out of the market.

In the end, both sides acknowledged that price volatility was bad for everyone and would hurt long-term planning. They also called for more investment in technology to enhance production and reduce carbon emissions. Cooperation and technology development will define how well the industry is able to meet the world’s growing energy demand.

One of the key initiatives of the group has been to create a database—the Joint Organizations Data Initiative—that enhances transparency for both oil consumers and producers. The database includes the collection of monthly oil statistics from member countries, including production, demand, and stock levels. That type of transparency can only reduce perceived supply shortfalls that could lead to price swings.