We need a stable oil price – but we're at the mercy of Opec

BP famously "doesn't do" oil- price forecasts. After 18 months in which crude has ricocheted from just under $100 per barrel to an all-time high of $147, then down to less than $40, and now up to $73 again, you can see their point.

But at the launch of its annual Statistical Review of World Energy last week, its chief executive, Tony Hayward, came close when he ventured "there is a rational argument to say that somewhere between $60 to $90 a barrel is the right sort of level". At the same time, BP continued to claim that there is no geological shortage of oil, and sought to blame the recent volatility on Opec's refusal to open up to Western investment. These arguments are wrong, partial or beside the point.

Mr Hayward justified his price range on the basis that Opec members, who hold the bulk of the world's remaining reserves, need at least $60 per barrel to fund their social programmes while also investing in new fields. At the other end of the scale, recent history suggests that consumers only cut back once the oil price hits $100 per barrel. For that reason, he implied, oil ought to settle somewhere in the $60-$90 range. If only.

So far, the market seems to be with Mr Hayward. The oil price has rebounded since the start of the year, and this week broke through $73 as data suggested the economy may soon be on the mend. This latest uptick prompted Alistair Darling to warn that the oil price "has the potential to be a huge problem as far as the recovery is concerned", and he is right – but probably not yet.

The slump in oil demand caused by the recession has left Opec with enough spare capacity – officially, at least – to supply several years' recovery, and the cartel would be foolish to strangle the upturn at birth. The one scenario which might keep oil in Mr Hayward's range is if we stay mired in recession – but I don't think that's what he had in mind. Nor is it the most likely short-term outcome.

One fundamental problem is that although the economy may be about to rebound, the oil supply probably will not. The precipitous collapse from $147 per barrel has caused upstream investment to slump by $100bn, or 21 per cent. Developing a new field usually takes around six years, so if nervous companies continue to delay investment decisions as the recovery gathers strength, when Opec's current spare capacity is exhausted demand will again outstrip supply and produce another damaging price spike. Shell's chief executive, Jeroen van der Veer, recently warned that this "may already be in the making".

Even if investment conditions were perfect, it is doubtful we could avoid repeated booms and busts; there are more fundamental forces at work than money. Data in the BP Statistical Review confirms that that non-Opec oil production – the aggregate output from the entire world bar the 12-member cartel – slumped by 600,000 barrels last year. Non-Opec production has long been expected to peak around the end of this decade by many in the industry – including Rex Tillerson, the chief executive of ExxonMobil – and the size of last year's drop suggests that moment may now have arrived. If so, we are in Opec's hands as never before. If not, we soon will be.

Opec may still have lots of oil, but BP's suggestion that all would be well if only the cartel would lift its skirts to the international oil companies is self-serving. It is also wrong, or at least irrelevant.

Opec has failed to materially increase its capacity in the past few years, despite an unprecedented seven years of rising oil prices. The resulting spike and collapse were entirely predictable, and inimical to Opec's interests. If its members could have raised output to prevent this outcome they would have.

The cause of Opec's failure is essentially irrelevant. Whether it was the result of deliberate policy, refusal to allow outside investment or geological constraint – it is now widely feared the cartel has been grossly exaggerating the size of its reserves for decades – makes little practical difference. Whatever the reason, Opec's response is likely to be the same next time we hit the oil supply buffers. Still less are its members likely to give the international oil companies the access they crave.

A steady oil price at the upper end of Mr Hayward's range would be a good thing, shoring up both investment in the oil supply and renewable energy. Gazprom's chairman recently called for the creation of a Global Oil Agency to engineer price stability and protect investment. This is vanishingly unlikely, but without it we will continue to lurch between an oil price so low it throttles future crude supply and one so high it strangles the economy.

David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man; lastoilshock.com

Suggested Topics
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
Esteban Cambiasso makes it 3-3
premier league
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
people'I hated him during those times'
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
Dame Vivienne Westwood has been raging pretty much all of her life
peopleMemoir extracts show iconic designer 'felt pressured' into going out with Sex Pistols manager
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
fashionAlexander Fury's Spring/Summer 2015 London Fashion Week roundup
Arts and Entertainment
Lauryn Hill performing at the O2 Brixton Academy last night
musicSinger was more than 90 minutes late on stage in Brixton show
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
people''Women's rights is too often synonymous with man-hating'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam