Posted November. 10, 2007 08:50,
Because oil prices have been soaring daily, the prevailing idea is that it is only a matter of time before the price hits the $100 mark.
However, the Wall Street Journal yesterday offered 10 reasons that oil prices will not reach $100 in its `breaking views.com` column. The reasons include sufficient supply capacity, declining demand for oil due to oil price hikes, and the bubble contained in the current oil price.
The 10 reasons are:
Countries have sufficient petroleum reserves. The United States Energy Information Administration said that the oil reserves of OECD member countries reached at 4.2 billion barrels as of late June 2007, which shows that global oil reserves are near their historic high point.
Global petroleum deposits are also sufficient. According to statistics from British oil major BP, global oil deposits increased 12 percent over the past decade to reach 1.4 trillion barrels. The statistics do not include the 1.7-trillion-barrel oil fields around the Orinoco River in Venezuela. If they are included, the world will be able to maintain its current level of oil production 100 years from now.
There is room for increasing oil production as more sophisticated drilling rigs are introduced. With the continuing high oil price, the number of drilling rigs grew 45 percent, and new rigs are drilling more oil than before.
As production costs are still low, oil production is economically viable. For Royal Dutch Shell, a multinational oil company of British and Dutch origins, lifting cost per barrel of oil was $9 last year. For Saudi Aramco, the state-owned national oil company of Saudi Arabia, it was $4 or $5 per barrel. Even for offshore oil wells, which have the highest cost per barrel, the lifting cost does not exceed $30 per barrel.
There is a slim chance that the Iran shock that some worry about will not materialize. For starters, chances are low that the U.S. will attack Iran. For Iran, which generates 50 percent of its GDP and 90 percent of its hard currency income from oil exports, a cut in production would be disastrous for its economy. As other countries in the world keep reserve oil stocks, they can absorb shocks even in the worst situation.
Declining demand for oil caused by persistent oil price hikes also constrains further price hike. In 2006, the U.S. saw its oil demand decrease by 1.3%, while the world posted a mere 0.6-percent increase. This years oil demand is forecast to be at the same level as last year.
Countries are striving to reduce oil demand, cutting oil-related subsidies. Prices of energy derived from oil are steadily going up. This will reduce oil demand in the long term.
The oil price hike has been partly the result of the weak U.S .dollar. Oil prices are being artificially boosted by speculative capital flowing in the oil market as there is no other market to investment in because of concerns over the credit crunch caused by the subprime mortgage meltdown in the U.S.