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More oil stays put

Tue., Feb. 7, 2006

WASHINGTON – The Middle East, long recognized as a top oil producer, is taking on a new role as one of the world’s fastest-growing regions for energy consumption.

The increased clip at which it burns petroleum – twice its historical average and close to the growth rate of the Asia-Pacific region – is contributing to tight oil supplies around the globe while demand continues to rise in the United States and China.

The growing thirst for fuel in countries such as Saudi Arabia, Qatar and Kuwait reflects strong economic growth induced by soaring global energy prices. Another factor is that U.S. military operations in Iraq and Afghanistan greatly depend on diesel and jet fuel purchased in the Persian Gulf.

This increased demand, which is only now starting to register with many experts, comes at a time when a debate is intensifying about whether a supply glut may develop in the next few years.

With the Organization of Petroleum Exporting Countries pumping as much as it can – and threatening to cut output if there is any significant drop in demand – some analysts believe the cartel should be able to put a floor underneath prices wherever it sees fit for several years to come.

OPEC’s president, Nigerian oil minister Edmund Daukoru, recently suggested that the cartel is comfortable with an average price of $60 a barrel – so long as the global economy continues to grow at those levels.

But a different camp contends that the cartel’s ability to prop up prices could weaken in the coming years if projections prove correct that global production capacity will soon rise faster than demand. They point to projects scheduled to come on stream through the end of the decade in OPEC countries, such as Nigeria and Iran, and in non-OPEC countries like Russia and Brazil.

Cambridge Energy Research Associates, which is sponsoring a conference on the energy outlook this week in Houston, estimates that worldwide oil-production capacity will rise to 101.5 million barrels per day by 2010, leaving a healthy 7.5 million barrel per day emergency supply cushion in the event of an output disruption.

For now, though, the world has a supply cushion of under 2 million barrels per day, or 2 percent of total consumption. As a result, crude oil futures are likely to stay high because of geopolitical uncertainty and rising consumption linked to economic growth in North America, Asia and the Middle East.

The six Arab countries of the Gulf are in the midst of an economic boom that brought them an estimated $300 billion in oil revenues last year, which has, in turn, helped convert desert towns into some of the fastest-growing cities in the world.

Flashy, westernized Dubai – which has little oil of its own – has attracted much of the investment. Dubai’s economy grew an estimated 16 percent in 2005 and its population has mushroomed, kicking off a real estate boom that has lined its coast with skyscrapers. The emirate’s economy is thought to have been among the world’s fastest growing over the past decade.

Gasoline is subsidized and cheap in Dubai as it is in most Gulf countries, fueling local preferences for large sport-utility vehicles, which remain in vogue here even as they disappear elsewhere. In Iran, OPEC’s second-largest producer, oil demand grew by more than 6 percent in 2005 and Tehran has become a significant importer of gasoline to keep up with rising consumption.

By the end of 2006, the economy of the six Gulf Cooperation Council states – the UAE, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman – will have almost doubled to $600 billion compared to the average of about $300 billion for 2000-02, the Washington-based Institute for International Finance estimates.

Oil consumption in the Middle East rose 5.3 percent in 2005 to almost 6 million barrels per day, according to the Paris-based International Energy Agency. That’s not that far off China’s total consumption, said UBS energy economist Jan Stuart, who is based in New York.

To be precise, the combined consumption of Middle Eastern countries is still about 700,000 barrels a day below China, according to IEA statistics.

With no expectation of an imminent decline in global oil prices, Stuart believes economic booms in Saudi Arabia, Kuwait, Qatar and the United Arab Emirates are likely to continue for the next couple of years. That will help soak up any extra barrels, bolstering the high price.


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