Soaring Crude Prices and Future Policies

Changes in Crude Demand-Supply

The unusual crude price escalation is continuing. In August 2005 the North American WTI crude price broke a high of $70 per barrel, and though that price has since contracted to plus or minus $60 by November 2005, crude prices remain much higher than was previously considered usual.

In the U.S., the repeated onslaughts of massive hurricanes in the fall of 2005 triggered the temporary suspension of most oil production and refining operations throughout the Gulf of Mexico. This resulted in fears of a worldwide oil supply shortage, prompting the member countries of the OECD's subordinate organization, the IEA, to dip into their oil reserves in the amount of 60 million barrels. By supplying a daily amount of 2 million barrels for 30 days the IEA member countries were able to avoid a global supply shortage, but this was from the perspective of crude supply only. In actuality, it was the liquidation of global reserves that eventually supplemented this decline in U.S. petroleum product production.

Issues involving Crude Demand-Supply

There is a high probability that in the years to come crude prices will remain at a level much higher than was previously common. This is due to the indisputable future increase in the demand for oil by developing countries, such as China and India, together with continued supply shortages as the oil supply is unable to stay much ahead of demand in the coming years, thereby resulting in strained demand and supply.

According to the IEA's “Oil Market Report”, in 2004 the world demand for oil was 82.1 million barrels per day. The report cites 2002 demand at 77.7 million barrels per day and 2003 demand at 79.2 million barrels. Thus, in 2003 oil demand rose by 1.5 million barrels per day from the previous year, and in 2004 this increase was 2.9 million barrels. It is known that the increase in demand from 2003 to 2004 was much higher than usual, with China's demand for oil rising from 5.6 million barrels per day in 2004 to 6.4 million barrels per day in 2004, or an increase of 800,000 barrels. Together with demand increases in other Asian countries totaling 500,000 barrels, Asia alone accounted for an increase of 1.3 million barrels per day between 2003 and 2004.

Conventionally, there are two peaks in total oil demand trends for North America, Europe, and Northeast Asia, the world's heaviest consumers of oil. The first demand season is during the wintertime in the northern hemisphere. The second occurs during the summer driving season in the northern hemisphere, when the demand for gasoline shows a small-scale increase. In this way, the two oil demand peaks conventionally occur during the winter and summer, with early spring and early autumn being periods of low demand, thereby creating a balance between demand and supply and leading to lower prices. The range of the gap between low-demand and high-demand periods is at most 1.5 million barrels per day, and even within the annual increase in oil demand, such as the increase in 2003, this gap remains around 1.5 million barrels. The demand situation in 2004 completely demolished this pattern. Rapidly increasing demand from countries like China and India has come to wield considerable influence on the world economy.

Hypothetically speaking, if the kind of demand growth witnessed in 2004 of 2.9 million barrels per day was to occur every year from now on, global oil demand will reach 100 million barrels a day by 2010. That is an increase of 17.4 million barrels per day from 2005 levels.

One problem is the limited room for increased oil production. Aside from the OPEC countries, who are already on a declining trend of oil production in North America and the North Sea, oil-exporting countries have little leeway for increasing production capacity, and just how far production will shrink is a very important question. Additionally, though there are some countries attempting to increase production by a small degree, such as the Russian federation states and countries in Central America and Africa, the rate of increase is at a level where it's not clear if it can meet or exceed 1 million barrels a day.

After investigating the capacity for increased production among various countries around the world, it is clear that the only countries that show promise are those in OPEC.

And yet, even within OPEC, steadily increasing total annual production by over 1 million barrels per day is no simple task. Even Saudi Arabia, the largest oil-producing country in OPEC, announced that it would be unable to reach its target figures for production increases of 10.5 million to 12 million barrels per day, and that an additional several years will be necessary. Oil production in Iraq is currently stalled at 1.8 million barrels per day; if it is able to restore its existing oil fields, its production potential is thought to be around 6 million barrels per day. But even this future target for oil production in Iraq will only cover the increased demand in Asian countries and other regions for no longer than a few years. As can be forecasted from the future oil demand circumstances, a sudden drop in oil prices as a result of excess supply or overproduction is difficult to imagine, and it is thus imperative to address the issue of enhancing oil production with high oil prices as a premise. Furthermore, Japan should strive to lead the world with its experience in painstaking energy-saving efforts. It is clear that skyrocketing crude prices are something that must be reversed for the good of industries in many countries all over the world.