Imponderables over future direction of oil prices

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The Independent Online
The oil price has taken a battering over the past year, with Brent crude falling from around dollars 19 a barrel to just under dollars 13 in February as dealers worried about Opec's inability to stick to its production quotas, writes Gail Counsell.

But recent weeks have seen it rally - it is now trading at just over dollars 15 a barrel - as the fast-improving US economy and falling American oil stocks caused a switch in sentiment.

In the longer term most analysts see the price bobbing between dollars 16-dollars 18 over the next 18 months. But towards the end of that period the UN will probably lift its embargo on Iraq.

That could swiftly mean another 2 million barrels of oil a day returning to the world market - more than enough to cause the price to plunge back to dollars 12.

In theory other Opec members should adjust by cutting back production. But, given the bitter relations between Iraq and the rest of Opec, any deal would be fragile.

Further out the price will hinge on imponderables - Saudi Arabia has plans to increase its capacity by 50 per cent to enable it to pump 12 million barrels of oil a day by the end of the century. It would not necessarily choose to do so, but if it did it would be a powerful force pushing oil prices down.

Russia, too, with huge gas and oil resources, could alter the equation. But it and the rest of Eastern Europe also have considerable energy needs. The chances are that - assuming Western economic support - its consumption will rise faster than its production.

With no sign that the world is in danger of running out of oil and gas reserves - there are at least 50 years worth of known reserves - companies have to decide how much other producers will pump and how much the world will consume. They may then decide what the oil price will be and whether investment is justified.

This is particularly the case for the North Sea. Although strict cost-cutting has probably knocked the average oil price necessary to support new investment in a North Sea field back from dollars 15 a barrel to dollars 13, some fields are considerably more expensive to exploit. Meanwhile, Saudi Arabia could probably continue to make a profit on less than dollars 5 a barrel.

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