Oil Prices Could Remain High As Iraqi Production Falls Short
One would have thought that Bush would at least get the oil flowing after securing the oil fields intact, using some 30,000 SF troops. No such luck (or rather plan).
online.wsj.com
Oil Prices Could Remain High
As Iraqi Production Falls Short
Instead of emerging as the next great supplier of oil, postwar Iraq is turning into a long-term choke point that could help keep petroleum prices high for the rest of this year.
By Bhushan Bahree in Paris and Keith Johnson in Baghdad, Iraq
Iraq's oil ministry is backing off from making any short-term production forecasts, after missing a series of output targets. Thursday, acting oil minister Thamer Ghadhban declined to reaffirm Iraq's latest production goal -- 1.5 million barrels a day, or 60% of prewar levels, by mid-July. That target itself represented a postponement from the end of June. Instead, Mr. Ghadhban said the country was focusing on hitting a previously slated target of two million barrels a day by year end.
Despite Mr. Ghadhban's downbeat comments, oil prices fell, with benchmark U.S. crude oil dropping 94 cents to $29.01 a barrel on the New York Mercantile Exchange. At the same time, oil prices have remained stubbornly high following the Iraq war, something that few oil-market analysts anticipated. Indeed, many believed oil prices would quickly move lower after the war in a manner similar to what happened after the Persian Gulf War in 1991. Now, instead of cheaper oil, many experts say Iraq's failure to resume supplies will keep global oil prices high for the rest of this year.
The Iraqi oil ministry's backtracking on oil-production forecasts comes as sabotage and looting continue to hammer the industry, which has yet to export a single barrel of freshly produced oil since the war ended. Thursday, Iraqi officials reported yet another pipeline explosion, the sixth such incident of sabotage in two weeks. The country was exporting roughly two million barrels a day before the war began in March; output now is below one million barrels.
When U.S. and United Kingdom forces seized Iraq's oil fields largely unscathed this spring, oil prices plunged on expectations that Iraqi oil would flood the markets. That market scenario never panned out because of Iraq's postwar oil woes and other factors, including low oil inventories in the U.S. Prices have risen steadily since late May. High energy prices are acting as a drag on the global economy. The average price of U.S. crude for the April-June quarter has been nearly $29 a barrel -- the highest level in nominal terms since 1984.
World oil demand typically rises in the July-December half, as the industry prepares to produce wintertime petroleum products such as heating fuel for the U.S., Europe and Japan. Daily demand will hit 79.5 million barrels a day in the fourth quarter, estimates the International Energy Agency, up 3.8 million barrels from the current quarter.
Without Iraqi oil exports, "the rest of OPEC has to come close to exhausting spare capacity to meet" world demand later this year, said Michael Rothman, chief energy strategist at Merrill Lynch. "That leaves the world vulnerable to any other supply dislocation in the rest of the system, as happened earlier with Venezuela and Nigeria." Output disruptions in those strife-torn members of the Organization of Petroleum Exporting Countries, along with pre-Iraq War jitters, briefly sent oil prices to nearly $40 a barrel in late February.
One major question is how big the Iraqi shortfall will be. Gary Ross, chief executive of PIRA Energy, a consulting group based in New York, believes Iraq will be lucky to produce one million to 1.25 million barrels a day during the third quarter -- half of what he previously forecast. Some are more pessimistic.
"We would now even question whether Iraqi output can ever regain the prewar production level in a sustainable fashion during what now looks likely to be a lengthy period of occupation," J.P. Morgan oil analyst Paul Horsnell says in his latest report.
A big problem triggered by Iraq's moving output targets is the effect they are having on the output plans of other OPEC members. The cartel tends to be quick to cut output to shore up prices and slow to ramp up production to prevent shortfalls. That dynamic may be unfolding now. Saudi Arabia and other members of the cartel already cut back their output sharply this month -- partly to make room for a return of Iraqi oil, which has failed to materialize.
Thursday, Iraq's Mr. Ghadhban appeared to have given up on short-term projections of oil production after missing targets twice this month. He instead talked of levels for December. "By year end, we would like to regain most of the lost capacity, and we still have our eye on reaching around two million barrels a day" by then, he said.
Iraq's production is 900,000 barrels a day, he said, up 200,000 a day from two weeks ago. Iraq needs 500,000 barrels a day for domestic use. But of the scant surplus it is producing, some oil is being reinjected into wells, and most of the rest is bottled up inside the country because of sabotage, leaks and other disruptions to its transport system. |
