The annual average oil price of global benchmark Brent crude for 2011 is poised to be the highest (in both real and nominal terms) since 1860, the year after the birth of the modern oil industry in Titusville, Pennsylvania, according to a report by IHS Cambridge Energy Research Associates.
IHS Cera’s latest analysis indicates that prices are being sustained at record levels by a combination of growing demand, supply concerns and rising production costs. The company expected 2011 Brent average to end up at about $111, compared with its previous high of about $97 ($99 in constant dollar terms) set in 2008.
‘Brent crude prices are approaching their highest annual average, a level higher than the peaks recorded by other widely accepted benchmarks going back to Colonel Drake and the origins of the modern petroleum industry in Pennsylvania more than a century and a half ago,’ declared IHS Cera chairman Daniel Yergin. ‘Quite simply, we are looking at the highest average price since the age of oil began.’
The high prices had been buoyed, he said, by record high oil demand of 89 million b/d at a time of anxiety about supply from the Middle East and North Africa, where civil war disrupted Libyan supply for much of 2011 and the standoff between the West and Iran continues to increase tension. The report also cites rising oil production costs, such as rising labor and material costs, and the shift to increasingly challenging operating areas, such as the ultra-deepwater, as a factor in the record price levels.
‘These record prices are being driven by the fundamentals of supply, demand and costs,’ Yergin said. ‘With rising tensions over Iran, geopolitics are coming back into the oil price again.
‘This price level reflects a continuation of the trends from the “demand shock” that lead to the surge in prices that peaked in 2008. What would reverse the trend and send prices down again are a financial contagion and a European recession that slows the world economy.’
New capacity could ease supply concerns and price pressures in the longer term, the analysis says. Higher oil prices – combined with technological advances – have incentivized development of oil that is relatively expensive to produce, such as Canada’s oil sands, the pre-salt fields offshore Brazil and tight oil formations in the US. New capacity from these areas, along with new supply from Iraq’s ambitious planned expansion of output from its giant and relatively low-cost fields could ease price pressures in the coming years. DM