This commentary is from USAK's Energy Review Newsletter
http://www.turkishweekly.net/energyreview/TurkishWeekly-EnergyReview4.pdf
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With the mild weather and OPEC members’ reluctancy to hold promises for production cuts, OPEC’s basket price has seen $48 a barrel. But oil prices are on the rise again.

For peak oil camp, the production peak has already been arrived or is about to arrive. So the price catastrophy is very close. We should get ready to see high prices.

IEA’s chief economist Fatih Birol, however, claims that prices of $50 per barrel is too high. This is five times the average production cost per barrel.

However, European Union’s senior energy official, Andris Piebalgs has said he was “happy with oil prices where they are now”, because , as he claims, the higher prices will “encourage alternatives to oil without crippling the economy”. (Bloomberg)

The Saudi oil minister, Ali al-Naimi, in New Delhi has effectively put his veto on an emergency meeting of OPEC to cut production to save the oil prices from dropping below $50 a barrel.

OPEC’s ex-president Sadek Boussena from Algeria said “High prices are not in the interest of Saudi Arabia”, he added “We have all seen what $70 does, it attracts alternatives, it reduces demand. On the other hand, I don’t think the Saudis want oil below $50. They need revenue”

To confirm Mr. Boussena’s statement, Al Naimi said that Saudi Arabia’s policy was to maintain “moderate prices”.

But higher prices may help to all producers. Venezuela can benefit from economics of heavy oil reserves it has, Saudi’s may overwhelm with revenues, alternative fuels may be favourable again and oil companies may earn fat profits.

But Saudis and Mr. Birol may be concerned about the high prices effect on economy and demand. China with increasing demand may pull the prices higher, but as a result of her own effect, China may see the oil demand decreased because of increasing prices after sometime.

For example in May 2006, with the rising oil prices in April, Chinese imports fell 1.8% from a year earlier to 99 million barrels. However the imports rose 17% to $5.4 billion.

The same applied to Turkish energy market last year, with record cost of crude oil imports which is to be around 1/3rd of current account deficit, the high prices is expected to pull down the fast pacing economic growth of this year.

These concerns were also on the agenda of US President George W. Bush’s State of Union address last week. The expected increase of US (and also Europe) dependence on oil from politically unstable regions is one of the key motives for supporting alternative fuels. By 2017, he proposed to reach an ambitious target of around 10% alternative fuel mix in the total oil consumption and to double its strategic reserves to 1.5 billion barrels by 2027.

The US government will start buying 100,000 barrels a day this spring to fill the current strategic reserve capacity of 727 million barrels.US’s decision to double its strategic stockpiles will definitely help oil prices to recover from the 19-month low levels according to OPEC’s president al-Hamli.

US Department of Energy has to follow new guidelines to buy 11 million barrels. The department has yet to decide whether to buy through one solicitation or several solicitations. For the 11 million barrels, an average of $600 million has to be spended. This corresponds to an average price of $54.54 per barrel. But the department does not draw redlines regarding the price and quantity. So higher prices will not block the bid.

Saudi’s on the other hand is trying to increase their production capacity, for some, to get ready for a price attack in case Iran tries to use its oil weapon.

The risk premium for an attack against Iran is not totally dismissed, but markets may have become less sensitive to the continuous discussion of such an attack. The price rise this week is mainly motivated by the cold weather finally arriving to US.

So still no answer is found for prices, but there is an answer everyone agrees on, volatility of the oil prices is to be increased. China is also trying to expand its strategic reserves. Some relate this to a possible air attack against Iran in 2007.

Dr. Micheal Klare, one of the world's leading experts on the energy geopolitics forecasted an attack against Iran in an interview to theOilDrum. He said:

“Yes, I do believe that the US will conduct air and missile strikes against Iran in 2007, unless Ahmadinejad capitulates to Western demands and abandons uranium enrichment, which I don't see happening. I think Bush did learn something from Iraq: If you're going to invade a country because of suspicious WMD behavior, FIRST EXHAUST ALL DIPLOMATIC OPTIONS before your resort to force, so you can claim you had no choice in the matter. ….. I still think there will be chaos, but I don't think that this will deter Bush from going ahead with an attack on Iran.”

Although for some experts, a “Shock&Awe” air strike against Iran is highly unlikely, higher than moderate prices will continue for sometime. As long as world economy is in good shape and relatively unaffected by high prices, the oil prices may help to foster alternative energy sources. But a “Shock&Awe” attack against Iran will definitely shock&awe oil prices and world economy.

So from all these, it can be concluded that Birol’s $50 a barrel is moderate for Saudi’s, but not a trustable price level for big consumers. US sees the average price $54.54 by spring, but not limited to this tag.  Volatility is to be increased and higher prices can be good for alternative fuels. A risk premium for an attack against Iran is inside the basket, although the results for such an attack can be chaotic. Last but not least, one should always keep an eye on weather forecasts, too.

This commentary is from USAK's Energy Review Newsletter
http://www.turkishweekly.net/energyreview/TurkishWeekly-EnergyReview4.pdf
To subscribe email to energyreview@turkishweekly.net