Escalating violence in Iraq threatens to unleash an oil price spike that would put an end to the greatest period of price stability for nearly half a century, BP’s chief economist has warned.
The unusually high level of disruption to global oil production since the Arab Spring began in 2011 has been matched by a sharp rise in US oil output as a result of its fracking boom. This has kept supplies constant and prices stable, according to BP’s Christof Rühl.
US oil production soared by 1.1 billion barrels last year – the biggest rise in the country’s history – as the fracking companies increasingly turned their technology from gas to oil. This balanced out the disruption to supplies in the past three years in Africa and the Middle East, where outages have been running at 3 million barrels a day, compared with just 100,000 a day in the previous decade, BP figures show.
Without the disruptions, the oil prices would have tumbled, while without the surge in US production they would have soared, says Mr Rühl.
“This is the three-year period which has seen the least price volatility since oil prices were no longer regulated in 1970. If the world had only had these disruptions which we have seen in the last three years since the beginning of the Arab Spring you would have seen oil prices spiking and a discussion about strategic reserve release and damage to the economy and all the rest of it.
“And at the other extreme, if we had only seen these massive US oil production increases you would have seen prices coming under pressure and talk of Opec cuts,” Mr Rühl added.
But he warned that, sooner or later, the period of price stability would come to an end – with the problems in Iraq looking like a key contender to upset the status quo.
“This is an eerie quiet. This is a market on edge and it will remain eerily quiet until it becomes clear who gets the upper hand in these things that are completely unrelated – the disruptions or steady production growth in the US,” said Mr Rühl, pointing out that so far this year we have seen both elements continuing to increase. “This is a sheer coincidence: they have nothing to do with each other. There is no conspiracy theory. And that means it won’t last forever – it will fall off a cliff either side.”
Asked whether problems in Iraq would end the price stability, Mr Rühl said: “It’s another piece in the picture which I outlined. You have this tension between rising disruption and rising new production. What eventually will happen is that we will see these disruptions get out of hand or we will see the picture dominated by increases in production. Every kind of disruption which becomes bigger can tilt the balance in a certain way and Iraq is no exception to that.”
The oil price has increased by more than 4 per cent to about $122 after insurgents took over two major cities in the north of Iraq. The escalating violence could jeopardise supplies from the country if it spreads to the south, threatening the Baghdad, Karbala and Shia-controlled oil fields and export facilities, said Ole Hansen, of Saxo Bank.
And the fighting makes it virtually impossible to develop untapped resources in the north and east of Iraq, he added.
Mr Rühl was speaking as BP released its latest Statistical Review of World Energy. This revealed that global energy demand accelerated in 2013, but the growth, at 2.3 per cent, remained slightly below the historical average, dragged down by the sluggish global economy.
Growth in energy consumption in the emerging economies came in at 3.1 per cent, curbed by slower growth in China. However, consumption in the mature economies of the OECD grew by a higher-than-average rate of 1.2 per cent, entirely as a result of strong growth in the US.
Nonetheless, the emerging economies continue to dominate the growth in global energy demand, accounting for 80 per cent of growth last year and nearly 100 per cent of growth over the past decade.
Libya suffered the largest single decline in the face of renewed civil unrest, the report found.
Bob Dudley, BP’s chief executive, said: “The major disruptions to production seen throughout 2013 were balanced by continued rises in production elsewhere. This underlines the importance of continuing to secure these new supplies through continued access to new resources, policies to encourage markets and investment, and the application of new technologies worldwide.”
The US will leapfrog Saudi Arabia and Russia to become the world’s biggest producer of oil and gas in the next three years thanks to its reserves of shale oil, according to the International Energy Agency.
The review found that renewable energy production continued to grow – “albeit from a low base”. Renewable technologies such as wind, solar and tidal power now account for more than 5 per cent of global power output – and, including biofuels, for nearly 3 per cent of primary energy consumption. But sustaining costly subsidy regimes has become a challenge where penetration rates are highest – principally in Europe, where renewable producers are grappling with weak economic growth and strained budgets, the report cautioned.
For now, though, the big energy story remains oil and whether Iraqi disruptions or US production increases will win the day – a further front in the battle between the US and Iraq.
The pound broke through the $1.70 mark yesterday as Middle East turmoil and imminent interest rate rises sent dealers rushing to bet on sterling.
The pound has not traded above the psychological benchmark since August 2009 but it reached $1.7011 in early trading, with currency markets still reverberating from the Bank of England Governor Mark Carney’s warning last week that interest rates could rise sooner than anticipated.
Sterling failed to hold above $1.70 as automated selling instructions kicked in. Currency markets are now focused on the minutes of the Bank of England’s June meeting, to be published later today.