US output has kept prices steadiest in 50 years, but rising violence in Middle East nation threatens to tip the balance
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 surge in US oil output as a result of its fracking boom. This has kept supplies constant and prices stable, according to BP's Christof Ruhl.
US oil production soared by 1.1 billion barrels last year, the biggest rise in the country's history as 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 three million barrels a day, compared to just 100,000 a day in the previous decade, BP figures show.
Without the disruptions, the oil price would have tumbled, while without the surge in US production they would have soared, Ruhl said.
"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," Ruhl 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," Ruhl said, 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 Iraq problems would end the price stability, Ruhl 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 US$122 after insurgents took over two major cities in the north of Iraq.
The escalating violence could threaten supplies from the country if it spreads to the south of the country, threatening the Baghdad, Karbala and Shiite-controlled oil producing fields and export facilities said Ole Hansen, of Saxo Bank.
Furthermore, the fighting makes it virtually impossible to develop untapped resources in the north and east of Iraq, he said.
Ruhl was speaking as BP released its latest Statistical Review of World Energy. This revealed that global energy demand accelerated in 2013 but, at 2.3 per cent, the growth 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.
The US will leapfrog Saudi Arabia and Russia to become the world's biggest producer of oil and gas in the next three years on the back of shale oil, according to the International Energy Agency.
• Global energy demand accelerated in 2013 but, at 2.3 per cent, growth 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.
• Consumption in the mature economies of the OECD grew by a higher-than-average rate of 1.2 per cent as a result of strong growth in the US.
Source: BP Statistical Review of World Energy.