Opec needs clear demand signals for spare capacity

Oil cartel Opec scolded consuming nations on Tuesday for forcing it to spend billions on spare crude production capacity while sending confusing policy signals on future demand.

The Organisation of the Petroleum Exporting Countries has an estimated 100 exploration and production projects with investment in the region of $100-billion to meet rising demand, but justifying spare capacity to calm oil market nerves was difficult, said acting secretary general Mohammed Barkindo.

“Energy security has to be seen from two sides of the coin—supply security and demand certainty,” Barkindo told a conference on fuel price risk in Singapore.

“Transparency on demand is more to do with the policy of consuming countries—it’s difficult to convince bankers to cough out large amounts of money when the market is not certain.”

Opec forecasts demand for oil to grow at 1,5-million barrels per day (bpd) until 2010, led by developing countries and the transportation sector, but Barkindo said supply growth would meet or exceed new demand.

“This will bring sufficient upstream capacity,” he said. “We in Opec do not subscribe to the peak-oil theory.”

Mixed directions

Barkindo again raised Opec’s standing request for a “demand road map” for consumers who are increasingly turning to alternative energy sources—often based on domestic crops or coal—to enhance supply security and cut import costs.

“Key consumers are beginning to say we must replace oil,” he told Reuters on the sidelines of the conference, pointing to policies favouring biofuels such as ethanol and plans for a revival “with a vengeance” for nuclear power.

“We are not against the development of alternatives, because oil is a finite resource and it’s important for the global economy to have a sufficient mix,” he said.

“What Opec is really concerned about is discrimination of oil vis-a-vis alternatives—if you look at levels of taxation in Europe, this clearly discriminates against oil and goes beyond environment [concerns].”

He said consumers such as the world number two China and growing India must also provide more reliable and up-to-date data on demand to provide Opec the confidence it needed to fund capacity that would be reserved for emergencies.

“Can Opec countries on their own afford to develop excess idle capacity of 10-15%? I’m not sure about that,” Barkindo told Reuters.

“Consumers must sit down with us and lay out demand projections, backed up their own policies.” - Reuters

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