World's Energy

Dec 18, 2008 - Your Oil and Gas News - Oil prices slipped to a four-and-half-year low last night even as Opec announced its largest production cut, totalling nearly 5 per cent of global output, in the cartel's latest effort to bolster prices. At a meeting in Oran, Algeria, the organisation of oil exporters said that it would slash supplies by a further 2.2 million barrels a day to 24.84 million barrels from January 1. The cut exceeded Opec's previous record cut in 1999 of 1.7 million barrels. Chakib Khelil, the Opec president and Algerian Energy Minister, said that the latest cuts had brought the total reductions announced by the cartel since August to 4.2 million barrels a day - or just under 5 per cent of global production, which averaged 86.3million barrels a day during the third quarter of this year. “The impact of the grave global economic downturn has led to a destruction of demand, resulting in unprecedented downward pressure being exerted on prices,” Opec said in a statement justifying the action. Nevertheless, oil traders remained unimpressed, with some questioning whether all Opec members would comply with the steep cuts - a continuing problem for the organisation. After the announcement, the price of a barrel of benchmark US crude quickly dropped to a low of $40.20, its weakest level in four and a half years. With demand collapsing, as some of the world's biggest economies enter recession and growing signs that Chinese oil consumption is also weakening, crude prices have slipped by more than $100 since July, when they briefly touched a record of $147 a barrel. Andrew Horstead, energy analyst for Utilyx, predicted further price falls below $40 unless other countries joined forces with Opec with production cuts of their own. He said: “The demand numbers coming out of the US are incredibly weak, so I doubt if this will be enough to push prices higher on its own.” Earlier, there had been speculation that Russia and Azerbaijan, which are not Opec members, would join in with the co-ordinated action and make cuts amounting to 600,000 barrels per day.John Hall, an independent oil analyst, said that these represented a “token gesture” because both countries were already reducing production for reasons such as a lack of investment and were dressing these up as collaborative market action with Opec. “The real problem Opec has is one of compliance,” Mr Hall said. “The market just doesn't believe it can demonstrate its members are going to follow through in full.” Mr Khelil rejected claims that some members might choose to produce more than their quotas. “I can tell you it's going to be implemented and it's going to be implemented very well because we do not have a choice,” he said. “If not, the situation is going to get worse.” Opec, which was formed in 1960 and whose 12 members include Saudi Arabia, Iran, Iraq, Nigeria and Venezuela, produces about 40percent of the world's oil supplies. The cartel's production cuts were condemned by the White House. Tony Fratto, a spokesman, said that the cuts risked further undermining an already fragile global economy. “Opec has an obligation to keep the market well supplied and to consider the health of the global economy, so efforts to limit the benefits of lower energy prices are short-sighted,” Mr Fratto said. Oil exporting governments are struggling to deal with the rapid collapse of oil prices, which is undermining their public finances. Saudi Arabia, Opec's biggest producer and de facto leader, said last month that it was targeting $75 a barrel, which it considered a fair price for oil. Other members, including Venezuela and Iran, have been pushing for higher prices. The AA said this week that UK average petrol prices have fallen to their lowest level for more than 21 months. The price of petrol fell 5.4p between mid-November and mid-December, from 94.9p to 89.5p a litre, a level last seen in March 2007. Diesel costs, helped by hefty cuts by supermarkets, dropped 6.89p, from 108.82p to 101.93p a litre. A family with two petrol cars is spending £64.77 less per month than it was in the summer.
Demand in US tails off: Opec's efforts to turn round the oil market have traditionally been like steering a supertanker. It is a lengthy process. Historically, the price of oil has been closely correlated with economic performance. High energy prices have fuelled inflation, hit demand and crimped output. The record price of oil only five months ago undoubtedly played a part in the present slowdown. Yesterday's production cuts were dramatic, but until the extent of the economic downturn becomes clearer, the recent slump in oil prices will be difficult to arrest and harder to reverse. Opec knows that the issue of price is one of supply and also demand. The US Government predicted yesterday that demand for oil in the US, the world's largest consuming country, is set to level off and is unlikely to grow at all between now and 2030. Growing use of alternative fuels, increased energy efficiency and a decline in the use of gas-guzzling cars and SUVs is shifting US oil use, according to the Energy Information Administration. In a report yesterday the agency predicted that the use of renewable energy, including solar, wind, biofuels and tidal power, would grow by 3 per cent per year. Overall energy use is expected to increase gradually but at a significantly slower pace than expected a year ago. The EIA, the arm of the US Government that produces official statistics on energy, also concluded that US reliance on imported oil will fall. It said that imported liquid fuels, mainly oil, would meet 40 per cent of US needs by 2025, down from 58per cent. US oil demand is weakening rapidly as the country slips into recession. Figures from the International Energy Agency this month showed November demand in the 50 continental states was about 18.5 million barrels per day, down nearly 10 per cent on a year ago. That still represents some 21 per cent of global demand of about 86 million barrels. But US reliance on imported oil from countries such as Saudi Arabia and Venezuela has become a major political issue. President-elect Barack Obama has pledged to reduce America's dependence on the fuel and this week appointed Stephen Chu as his energy secretary. Mr Chu, a Nobel prize-winning physicist from the Lawrence Berkeley Laboratory in California, is a proponent of alternative fuels and a developer of scientific solutions to climate change. T. Boone Pickens, the Texan oil billionaire, has started a campaign to shift America away from its dependence on imported oil by building huge windfarms across a central belt of the US. Without incentives to further reduce US reliance on fossil fuel, the EIA forecast American CO2 emissions would continue to rise by 0.3 per cent a year, compared with an annual average increase of 1.1 per cent since 1990.