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World Petroleum Congress optimistic about oil price

The oil industry doesn’t expect a sharp drop in crude prices any time soon. The mood at the World Petroleum Congress is buoyant. Doha, the Qatari capital playing host this week, is putting on a good show

Mammoth corporate stalls, some of them bigger than small houses and all of them serving up big dollops of self-congratulation, fill a giant exhibition hall.

With the congress under way, Qatar and its countless construction cranes feel far from Europe, where chronic sovereign debt problems still trouble the euro and economic optimism is plummeting.

And despite claims to be a carbon-neutral conference, the congress feels even farther away from Durban, where international negotiators are trying to agree a strategy to control greenhouse gas emissions.

But for all the exuberance, concerns about an escalation in tensions between Iran and the West, and nagging worries about what an oil-price spike could do to the global economy, and oil demand, hang over the conference.

After all, an article of faith among the executives gathered in Doha – and repeated like a creed from the podium – is that oil’s got a long future ahead of it. Demand from Asia, Latin America, Africa and the Middle East underpins that confidence. Indeed, a bullish long-term consumption outlook last month from the International Energy Agency (IEA), the consumer countries’ watchdog, made that clear.

The IEA forecast that the world would need 99 million barrels a day (b/d) of oil by 2035, a 14% increase on last year’s production of 87 million b/d. Almost all of the demand growth would come from developing countries.

For oil producers the question isn’t whether this demand will materialise so much as whether they’ll be able to meet it. The IEA reckons supply in 2035 will be 3 million b/d short of its demand forecast.

Gulf exporters are confident. Kuwait’s oil minister, Mohammed Al-Busairi, said on 5 December, that his country would spend $180 billion in the next 25 years to lift production, which will rise even sooner, from 3 million b/d now to 4 million b/d. That growth, on its own, would meet a third of the supply gap projected by the IEA, which pegged Kuwait’s output at just 2.7 million b/d in a decade’s time and only 3.5 million b/d in 2035.

If Iraq comes anywhere close to its ambitious production target of 12 million b/d, moreover, or the US lives up to bullish predictions about its shale-oil potential, meeting the world’s needs shouldn’t be a problem.

But despite the air of optimism about oil’s longevity, the short-term outlook for the oil market is riddled with uncertainty. There are good reasons to think another price spike is on the way – but just as many omens that the market could turn bearish.

Start with the reasons for another bull run. Just as Libya’s problems begin to fade, an older geopolitical worry – Iran – is looming again. The storming of the UK’s embassy in Iran last week makes more diplomatic action against Iran likely, and a French initiative would see the EU ban Iranian oil from its countries, possibly from January.

EU sanctions on Iranian oil imports, agree many analysts, would hurt Europe as much as Iran, which would find buyers in Asia, especially in India, to make up for the export 750,000 b/d shortfall.

And other Mideast Gulf, and maybe west African, exporters would scramble to replace Iranian exports to Greece, Italy and Spain. But that would take time, forcing crude prices higher.

EU oil-import sanctions on their own may not force prices to $250 a barrel – the figure pinpointed by Iran’s foreign ministry. But the EU is also proposing financial sanctions targeting the Central Bank of Iran, which would disrupt the country’s ability to handle crude payments from other clients, throwing the country’s export schedule out of kilter.

Any kind of sharp rise in oil prices now could be disastrous for consumer economies in the West, which are still battling a fierce debt storm. If an oil-price spike induced another global downturn it could also shred some of the demand projections. After the price surge of 2008, global consumption fell by about 2 million b/d in the following two years. In OECD countries, the drop was almost twice as great, and demand remains well below mid-decade highs.

So producers have something to fear, too. “After Libya, we don’t need another crisis,” one senior Opec leader told Petroleum Economist today. That’s a sentiment that might influence the group’s meeting in Vienna on 14 December, where members must decide whether to roll-over existing oil-production quotas or cut them.

And for all the exuberance in Doha this week, the oil industry should remember what happened at the last WPC. That was in Madrid, in 2008, back when sovereign default was still just a problem for undeveloped countries. Oil prices were soaring and the industry was in party mood. A stand-off between Iran and the West was hanging over the market then, too.

Three weeks later, prices peaked at over $147/b. Six months after that conference they were struggling to remain above $30/b.

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