Global market in oil at point of 'Peak Demand'

TEHRAN, Dec. 20 (MNA) – Director of Petro Scotland expressed his skepticism towards IEA forecasts, saying that once the oil price approaches $60/barrel for any length of time, there are some possibilities to lead to the oil price collapsing again.

Chris Cook, a senior research fellow at University College London, said once the oil price approaches $60/barrel for any length of time then there are three possibities to be combined to lead to the oil price collapsing again: "(a) A flood of high cost but easily accessible, US shale oil; (b) substitution by renewable energy which becomes cheaper by the day; and (c) the simple fact that the more expensive carbon fuel gets in Dollar terms then the more Dollar profit there is in saving it."

As Chris Cook observes, lack of cooperation is a consequence of the existing dysfunctional market model of 'oil-as-a-commodity' where oil is bought and sold for transaction profit by middlemen. "I believe that it is now possible for Iran to lead a market transition to supply oil directly to refiners on a partnership basis of production sharing with refiners in entitlements to products."

In an exclusive interview with Mehr News, Cook answered the questions regarding the issue:

Oil prices continue declining slowly. Do you think they have reached the bottom, or we should wait for the next negative record this year?

In the absence of significant production cuts I have no doubt that the price has the potential to fall much further, and I do not disagree with the view of Goldman Sachs - the US investment bank - that it could fall to $20 per barrel or less.

 

Iran is trying to lure back international oil companies to develop its vast oil and gas reserves once sanctions are lifted under a deal with world powers, and recently lifting of four of them on Iran's petrochemical industry. Do you think it will have strong effect on the oil price? How will Iran's presence affect the market?

Even the upgrade of existing infrastructure takes considerable time to mobilise even when financing is both available and deliverable into the contractors' bank accounts. So the development of new oil and gas fields cannot even begin until agreement is reached between Iran and international oil companies. So I cannot envisage that such development in Iran will affect the oil price for years to come. In the short term, unwise action by Iran - such as dumping oil stored in tankers on the market, or rapidly ramping up production to sell into the market - can benefit only the buyers, who will probably think that Christmas has come early!

In my view Iran should carefully examine other types of oil supply and funding arrangements such as oil swaps and prepayment.

 

The future of this trend is in favor of what groups or countries? Is it beneficial to consumers or producers? What is the effect of falling prices on the countries of Middle East, especially Iran?

Naturally, falling oil prices benefit consumer nations in the short term to the detriment of oil producers. But for consumers, the effect is a little like the effect of illegal drugs: it feeds an addiction to oil, and through increased consumption it means that another boom cycle in oil prices will only be a matter of time. As Mr. Zaki Yamani, the former Saudi oil minister said: "The cure for low prices is... low prices".

 

The IEA said in a monthly report in December that growth in demand for oil will ease next year to 1.2 million barrels per day, from 1.8 million barrels a day this year. Why will many oil producing countries, largely OPEC member states, not reduce production in a coordinated effort to raise prices?

I am a long-standing sceptic of IEA forecasts. Firstly, the IEA assumes that consumer nations will be able to pay for increased demand no matter what the price is, and this is manifestly not the case. Secondly, it is impossible to tell how much of China's demand in particular is for refining and consumption, and how much is simply for storage both as a strategic reserve and on the premise that at the zero $ interest rates which applied until last Wednesday, reserves of oil also represented a better investment than holding reserves of dollars.

In my view once the oil price approaches $60/barrel for any length of time then: (a) a flood of high cost but easily accessible, US shale oil; (b) substitution by renewable energy which becomes cheaper by the day; and (c) the simple fact that the more expensive carbon fuel gets in $ terms then the more $ profit there is in saving it; will combine to lead to the oil price collapsing again.

In other words, I believe that the global market in oil has reached a point of 'Peak Demand' which demonstrates another of Mr Yamani's observations to the effect that the Stone Age did not end because of a shortage of stones, and the Oil Age will not end because of a shortage of oil. 

Finally, in answer to your question concerning production cuts, this lack of co-operation is a consequence of the existing dysfunctional market model of 'oil-as-a-commodity' where oil is bought and sold for transaction profit by middlemen. I believe that it is now possible - indeed essential - for Iran to lead a market transition to supply oil directly to refiners on a partnership basis of production sharing with refiners in entitlements to products. Such an oil for product swap is in the interests of everyone other than those who seek something for nothing, and it gives rise to an energy-as-a-service market model where collaboration and transparency are in everyone's interests.

So to summarise, the global oil and gas markets require - as President Rouhani pointed out at Davos almost two years ago - new multilateral institutions, agreements and market instruments.

 

What will be the effect of offshore development and rig building, having lower costs, on oil market prices and how will it be affected by the current oil market situation? 

Naturally, development of higher cost oil projects will be rendered more and more difficult the lower the oil price fall.

 

How will the low price of oil affect Iran's cooperation with European countries, including Scottish companies?

There are several European countries, notably Spain, Portugal, Italy and above all, Greece, where the need for security & diversity of supply - combined with constraints over € bank credit to purchase oil at all - are an excellent fit for Iran's need for security and diversity of demand, and capacity to enter into the oil for product swaps described above. In the case of Scotland, there is scope for such swaps to be extended to the exchange of the value of state of the art oil & gas technology and services for the value not only of Iran's oil, but also for the value of oil and gas savings in Iran, where there is a great deal of scope for improvement. As a wise man said, the cheapest oil of all is oil saved!

 

Chris Cook is a Senior Research Fellow at the Institute for Security and Resilience Studies at University College London. Chris was director at the International Petroleum Exchange IPE. IPE is known for trading Brent Crude until 2005. Chris Cook was originator of the Iranian oil bourse.

Interview by Lachin Rezaian

 

News Code 112964

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