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A Thirst to Quench, at a Good Price

Global oil prices are staggeringly high, but poised to decline in the future. For a global economy that remains heavily dependent on oil, this is good news.

Oil prices are poised to decline. This is no black magic, but the result of geopolitical and industrial facts. The WTI blend of crude oil (the main American blend) has now reached 105 US dollars per barrel while the European Brent blend has topped at 125. The turmoil in the Middle East has left its mark on oil prices for the past few years – after all, one third of the world’s crude oil is produced in a conflict area. The costs of the current Iranian tensions are written directly into the numbers: The difference between spot prices for the WTI blend (what you pay for a barrel now) and “future” prices in five years (what you pay now for a barrel you will receive in 2018) is at a staggering 30 US dollars. The longer you are willing to wait, the cheaper your oil will be. As a rule of thumb (if we neglect the impact of inflation and financial turmoil), 30 US dollars per barrel would then constitute the “cost of the crisis.” We may also term it “fear speculation”: Investors may be hoarding paper oil not out of mere greed but due to the risk of a possible conflict outbreak in the near future.

There are other factors to consider as well. Some oil-producing countries are either back in business or simply performing well. In Libya, some drilling operators have already reached pre-conflict production levels. Forecasts estimate that production might increase from today’s 1.6 million barrels per day to as much as three million barrels by 2020. The Iraqi oil industry is also doing well. In December 2011, the country reached a 20-year production high of three million barrels per day. Oil minister Noor Al-Maliki recently predicted a future national potential of 13 or 14 million barrels. That level might only be attainable if unexpected new oil reserves are found – which, like Aladdin’s lamp, would promise the fulfillment of Iraqi wishes for prosperity.
But even a more conservative estimate of seven million barrels per day would have a cooling effect on oil prices.

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