Press releases

The reasons behind the rise in the price of oil to $100 a barrel - An analysis by IFP Energies nouvelles

02 February 2011

The crises in Tunisia and Egypt have impacted on the price of oil, which broke the $100 a barrel barrier in late January. How is the oil market being affected? What developments can be expected over time? What will the impacts be on the economy? IFP Energies nouvelles provides answers.

 
Is the recent rise in the price of oil solely linked to events in the Maghreb?
Recent fluctuations which have pushed Brent crude up to $100 a barrel are a direct result of the events in Egypt which began on January 25. However the rise began earlier in mid-December when the $90 a barrel threshold was crossed as part of an ongoing upward trend since November. There is a variety of reasons which are linked to the US Federal Reserve support plan, a relatively optimistic global economic outlook, the harsh winter which increased demand, but also to the protests in Tunisia which began on December 17. The notion of the spread of protest movements has gradually been assimilated by the markets, pushing Brent crude towards $98 a barrel on January 14. The initial demonstrations on January 25 in Egypt only served to reinforce these fears. IFP Energies nouvelles considers that this risk of unrest spreading has been factored into current market prices.

What role do the Maghreb countries play in the oil balance?
Production in these countries is relatively significant since it stands at over 4 million barrels per day, i.e. approximately 5% of global production. However it is not currently under threat. The other issue of course is the strategic role of the Suez Canal route which provides access to the Mediterranean to deliver oil to Europe and onwards to the United States. Volumes are estimated at over 2.1 million barrels per day, some of which passes through the Canal and the rest via the SudMed pipeline. It should be remembered that this route can be bypassed by going around Africa, but this would entail longer timescales and higher transport costs.

Can future developments be predicted?
Until a clearer picture emerges of the outcome of the current political upheavals and their consequences for other countries in the region, we can assume that the market will remain volatile and under pressure, i.e. at approximately $100 a barrel. Further events in other countries or even the slightest impact on oil production would lead to significant price surges. IFP Energies nouvelles draws attention to the fact that even before these political crises, the market was already anticipating future tensions linked to the progressive reduction of available OPEC capacity, estimated by the IEA to be just over 5 million barrels per day. The IFP Energies nouvelles reference scenario for 2011, established before the crisis broke out in Egypt, predicted a balance of between $80 and $95 a barrel, compared to $80 a barrel on average for Brent in 2010.

Could OPEC take action?
OPEC did not create a shortage in 2010, but responded to the rise in demand by adjusting production to exceed the quotas set in December 2008. The 2010 price increase is not therefore linked to a restrictive policy on the part of OPEC, and this moreover limits its ability to take action.
If current events were to impact on production, it would be able to increase supply by using its spare capacity. By reducing production margins, this would probably have the effect of maintaining pressure on prices.

What would the impact be on economic growth of long-term high prices?
For industrialized nations in particular, a rise of $10 a barrel represents approximately 0.25% of GDP. If prices were to remain at $100 a barrel for the long term, i.e. $20 higher than in 2010, the impact would be 0.5%, which is particularly significant when economic recovery is still fragile. It should be recalled that the IMF is counting on fairly sustained 3% growth in the United States, but only approximately 1.5 % for European OECD member states and Japan. The impact on the transport sector and on the price of gas in Europe and Asia, which are still largely dependent on the price of oil, should also be emphasized. Also of note are the inflationary impact and the risk of a rise in interest rates which this could entail.

Is this factor likely to push oil prices down?
The market will have to find a happy medium between geopolitical risk and economic growth, which could lead to very sharp adjustments in prices in the coming months. An initial upward phase followed by a marked reversal during the year cannot be ruled out. The IFP Energies nouvelles balance scenario for 2011 of less than $100 a barrel incorporated some of the element of risk posed to the economy by excessively high oil prices. Most OPEC members are well aware of what is at stake in the long term and are attempting to reassure the markets. However a similar approach did not stop prices from surging to nearly $150 a barrel in early 2008.