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2011: A year that defied predictions

Anyone who, a year ago, said 2011 would see civil war in Libya; Muammar Qadhafi toppled and executed; revolutions in Tunisia and Egypt; a revolt in Syria; the quashing of a rebellion in Bahrain by Saudi Arabia; a new nuclear crisis; the near-collapse of the Eurozone; and a renewed pessimism in the global economy should be a candidate for some kind of Nobel prize

We certainly didn't predict it all, and in last year's outlook for 2011 we got a few things wrong, too.

The euro didn't strengthen, as we expected it would - though better minds also expected more action from Europe's leaders. Electric cars didn't make an impact on the global automobile market - or, if they did, everyone was too worried about everything else to notice. Despite their strength, Chinese national oil companies  didn't go on the kind of shopping spree for foreign assets that we expected. And the US government surprised everyone - including us - by delaying its decision on the Keystone XL pipeline from Alberta.

But we got some things right. We said China's power over global oil markets would grow. For all the supply-side risks associated with the Arab Spring and what it means for the big oil-rich countries in the Middle East, it is demand from China that continues to put a floor beneath oil prices. What happens in China will, in the coming months, have most influence on whether the global economy blooms or withers again. A Chinese house-price bubble, worries about the country's banking system, and in particular the shrinking of its export markets in the West are bad omens.

We said oil prices would remain strong - but face threats towards the end of the year. "Bears will be rewarded later in 2011," we predicted, "when it becomes apparent that high oil prices are, again, destroying demand. Even China may show some signs of oil-price fatigue. Stagnant demand in Western economies will become more obvious, as high fuel prices become another de facto tax on consumption. It won't be an easy year for many in the West, where governmental budget slashing will push up unemployment." That still rings true, though good economic news from the US is supporting oil prices.

Oil to stay in triple digits

All being normal, Europe's problems and the threat of a slowdown in China and other BRIC countries (Brazil's economic growth may have halved, at best, in recent months) should be enough to deflate the oil price. Oil should keep its triple-digit status for much of 2012, but the risks of a sharp dip and a spike are high - and we could see both - especially if Western countries impose reckless new sanctions on Iran, shutting in its exports. That would be extremely bad news for the global economy. But it wouldn't much worry oil producers. Opec countries enjoyed a bumper year in 2011, when their income reached around $900 trillion, almost 40% higher than in 2010 and close to the record receipts accrued in 2008. At its recent meeting in Vienna it lifted the production ceiling to 30 million barrels a day.

But more important than the number was the new mood of co-operation within Opec, particularly between its two heavyweights, Iran and Saudi Arabia. Unity will be crucial for Opec if falling demand begins to soften markets - when members, more conscious than ever of their dependence on inflated prices, will act swiftly to prop up futures.

The climate didn't have a good year. Emissions grew by their highest margin ever, said the International Energy Agency. They probably won't rise as quickly in the coming 12 months, but the climate conference in Durban didn't leave anyone other than big emitters much encouraged. Once again, the world will have other priorities in 2012, when the Kyoto Protocol will expire - probably without an adequate replacement. Other petro-states, following Canada's lead, may even withdraw.

LNG surges, but US sees gas gut

Our safest prediction last year was that US natural gas prices would remain low, but that hardly tells the global gas story at all. The shutdown of Japanese nuclear power reactors following a hugely destructive and deadly earthquake and tsunami in March resulted in the world's largest liquefied natural gas (LNG) importer buying 15% more gas to make up for the loss of its atomic energy capacity. LNG spot prices nearly doubled to $18/million British thermal units in late summer compared with pre-quake levels, causing UK and European gas prices to surge as LNG tankers sailed away from the Atlantic to the Pacific basin.

Japan's decision to delay restarting reactors and reconsider continuing with nuclear power means that billions of dollars of expensive Australian LNG export megaprojects suddenly look less risky, while the US - bloated with shale gas - signed three LNG export deals which could see the country become another global producer.

The meltdown at the Fukushima Daiichi nuclear power plant also prompted Germany to start phasing out all nuclear power, increasing its reliance on gas and coal.

But with Angola LNG and Australia's Pluto project expected online in 2012, expect spot LNG prices to soften and remain around $13-15/million Btu, barring any major supply disruption or extreme weather. In terms of European pipeline gas, Gazprom will continue to fight for oil-linked gas contracts while its German customers continue to slip out of them.

Shale-gas boom to bust?

In the US, it's a different story. There's too much gas in that market and 2012 will be a year when the shale-gas boom may well begin to falter, as some producers hit the wall and others get gobbled up. Rig counts should at last begin to fall, pointing to some hope that Henry Hub prices will one day rise - just not anytime soon. In terms of US LNG, construction of export projects may start in 2012, closing one cycle of the shale gas revolution.

White House races are a bonanza of energy illiteracy and half-truths and the one in 2012 will be no different. Both sides will promise, again, some form of the energy independence. Republicans will point to the Bakken, where spectacular production growth will continue, Alaska and the Gulf of Mexico as evidence that the US can drill its way to oil autonomy. President Barack Obama will hope an oil-price spike doesn't deliver $4 a gallon gasoline and wipe out the US economic recovery, which should otherwise gather strength. There will be plenty of talk of oil sourced from evil despotic regimes, but no real solutions.

After the events of 2011, anyone hoping for stability in the oil market in 2012 will be disappointed. The Arab Spring is not over. The Iran issue looms. A war involving Israel is possible. Unrest in oil-producing regions, from the Gulf to Russia, where Vladimir Putin will regain the Kremlin, and to Kazakhstan, will once again inject geopolitical risk into the market. ExxonMobil's perplexing move into Kurdistan has already turned up the political temperature in Iraq. The withdrawal of US troops, and Iran's growing influence there, spells more trouble.

So politics should be enough to sustain the oil market's rally, but if things calm down the emerging theme will be demand. It's at breaking point. Consumption growth will soften in the coming months, say many analysts. But global demand fell by almost 2 million b/d in the two years after the spike of 2008. Anything close to that kind of drop would send oil prices tumbling. It would be a boost to the world economy - but a blow for producers. The industry's desire - for more oil income - and the needs of consumers, for cheaper oil, have never been further apart. Everyone should hope for some kind of convergence in 2012.

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