ZEW Energy Market Barometer - Global Thirst for Oil and Instability Continue to Jack Up Prices

Research

Despite ranging at an already high level, oil prices are not expected to relax durably in the coming years. About 200 energy market experts from energy supply, trading and service companies, as well as from the world of academia were surveyed as part of the ZEW Energy Market Barometer. 62 per cent of them assume that oil prices in Germany will continue to rise over the next five years, whereas only 12 per cent forecast price reductions.

On a six month-horizon, 44 per cent of the experts surveyed by the Mannheim Centre for European Economic Research (ZEW) on a biannual basis expect growing and 25 per cent decreasing crude oil prices. The expectations for the mineral oil market paint a similar picture.

53 per cent of the energy market experts reckon that the main reason behind this surge in crude oil prices is the insatiable thirst for oil worldwide. Uncertainty in the Middle East is the second most commonly stated cause for price increases. OPEC's strategic behaviour ranks only third among these three factors. Even though OPEC countries represent about 40 per cent of global oil production, only 19 per cent of Germany's overall crude oil imports originated from these providers in 2003. Imports from Western Europe account for a much larger share (34 per cent). At 31 per cent, Russia remains the most important provider.

From an economic point of view, rising demand particularly jacks up prices whenever supply barely responds to price changes. This currently applies to oil - at least in the short run. The U.S. Department of Energy estimates that Saudi Arabia and the United Arab Emirates are the only providers left with considerable spare production capacities. Therefore, the option of further opening the oil tap is limited. Even Iraq is currently unable to live up to its long-term potential although experts assume that it holds the second largest oil deposit worldwide following Saudi Arabia. Immense investment efforts are needed here to render conveying systems, pipelines, refineries and loading terminals fully operational. Such investments as well as secure supplies from countries such as Saudi Arabia require a certain degree of political stability. This stability, however, is threatened, not just in Iraq, but also in Saudi Arabia.

In the long term, global oil reserves also play an important role for the supply side. Many market observers expect production to peak within the coming two to three years, soon resulting in a notable shortage on the markets due to limited oil resources. According to numerous analysts, this effect is intensified by the fact that the reserves in non-OPEC countries drop much faster than those in OPEC countries (some of which are politically more unstable). This uncertainty surcharge ("Zitterzuschlag") might also explain why oil prices are expected to rise within the coming years.

Surging demand, the main driver of the oil price increase, can probably partly be attributed to the economic upswing in the U.S., the world's largest oil consumer. Demand is also increasing in countries such as China or India. At eight per cent, China's share in global oil consumption is much lower than that of the U.S., but China is among the fastest growing economies in the world (about 9.1 per cent in 2003). Possibly it is not only the current demand that drives the price, but also the expectations of continuously rising demand in the future.

A high oil price is usually a cause for concern in the U.S. economy and by now also in the eurozone. It is to be expected that the prices of other goods will reflect the increased costs for oil. About half of the experts surveyed for the ZEW Financial Market Report (July 2004) forecast growing inflation risks within the coming six months.

In the EU, opinions differ on how to best respond to this high oil price. It remains a fact, however, that a high oil price simply indicates an increasing shortage of oil. By cutting the eco-tax in response, Germany would thus neglect the nub of the problem. The reduced tax rate would first change the price system creating an incentive to consume more oil. An increased demand, in turn, drives prices and thus partly counteracts the desired effect of lowering them.

Note From the Editor

The ZEW Energiemarktbarometer (Energy Market Barometer) is an industry-specific indicator of economic sentiment based on a semi-annual survey of the energy supply, trade, and services industries, as well as regional suppliers in Germany. It comprises the expectations of about 200 experts on short (six months) and medium-term (five years) developments in the national and international energy markets. This press release is based on the latest survey conducted in May and June 2004.

Contact

Dr. Ulf Moslener, E-mail: moslener@zew.de