More capacity needed to tame record oil prices

FEED DEMAND: Raising output capacity is more important than pumping more crude to avoid further price rises, Birol said. (Getty Images)

It is more important for oil producers to raise output capacity than to pump more crude if they want to bring down record prices, the International Energy Agency's (IEA) chief economist Fatih Birol said on Wednesday.

US crude hit a record above $135 a barrel last week, prompting consumer countries such as the US to renew their plea for more oil from Opec.

But Birol said longer-term concern that future demand would outstrip supply was driving the price higher, and that all producers should respond.

"What we need is capacity expansion," Birol told newswire Reuters in an interview.

"It's not pumping more oil now that is the most important thing. What drives the prices is the perception that in coming years demand will be very strong and supply will not keep up."

Conventional oil supplies from producers outside Opec could peak in four to five years time, he said.

Top oil exporter Saudi Arabia had worked hard to ease supply concern but could increase capacity more, he said. Other producers in the Middle East and Latin America, as well as Russia the US and European countries "should all push the button" to boost capacity, he said.

"We need them to move and convince the markets that increases in capacity in the future will be at least as strong as demand," he said.

Saudi Arabia holds most of the world's spare oil capacity at around two million barrels per day (bpd). The kingdom aims to boost capacity to 12.5 million bpd by the end of next year from around 11.3 million bpd. The holder of the world's largest reserves has yet to announce plans beyond that.

Consumers also needed to play their part in bringing prices down by increasing energy efficiency, Birol said.

Birol said over the longer term oil prices were more likely to maintain their "higher trajectory" and were very unlikely to return to the $20-$30 levels of before 2000.

Demand growth was likely to come in at around a million barrels per day this year, and the bulk of that growth would come from China, India and the Middle East, he said.

Record prices have slowed demand in developed countries, but unless Asian countries cut subsidies, higher energy costs would not take their full impact on global consumption, he said.

"Today we have about $50 billion in oil product subsidies in China, India and oil producing countries," he said. "I think these countries should look very carefully at their pricing policies. I believe, especially in China, it is putting an economic burden on the governments."

Smaller Asian consumers are struggling to afford subsidies. Over the past week, Indonesia, Taiwan, Sri Lanka and Bangladesh have either raised regulated fuel prices or pledged to do so. (Reuters)

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM