The annual average oil price of global benchmark Brent crude for 2011 is poised to be the highest (in both real and nominal terms) since 1860, the year after the birth of the modern oil industry in Titusville, Pennsylvania, according to a new IHS Cambridge Energy Research Associates (IHS CERA) analysis. Growing demand amidst supply concerns and rising production costs are sustaining prices at record levels.
The
annual average price of Brent crude so far this year is well above its
previous high of about $97 (and constant dollar terms of about $99) in
2008. IHS CERA expects Brent to average about $111 for the year at the
end of 2011.
“Brent
crude prices are approaching their highest annual average, a level
higher than the peaks recorded by other widely accepted benchmarks going
back to Colonel Drake and the origins of the modern petroleum industry
in Pennsylvania more than a century and a half ago,” IHS CERA Chairman
and Author of The Quest, Daniel Yergin said. “Quite simply, we are looking at the highest average price since the age of oil began.”
The
high prices have been buoyed by record high oil demand of 89 million
barrels per day (bpd) at a time of anxiety about supply from the Middle
East and North Africa, where civil war disrupted Libyan supply for much
of 2011 and the standoff between the West and Iran continues to increase
tension. The report also cites rising oil production costs, such as
rising labor and material costs, and the shift to increasingly
challenging operating areas, such as the ultra deepwater, as a factor in
the record price levels.
“These
record prices are being driven by the fundamentals of supply, demand
and costs,” Yergin said. “With rising tensions over Iran, geopolitics
are coming back into the oil price again.”
“This
price level reflects a continuation of the trends from the ‘demand
shock’ that lead to the surge in prices that peaked in 2008. What would
reverse the trend and send prices down again are a financial contagion
and a European recession that slows the world economy.”
New
capacity could ease supply concerns and price pressures in the longer
term, the analysis says. Higher oil prices—combined with technological
advances—have incentivized development of oil that is relatively
expensive to produce, such as Canada’s oil sands, the presalt fields
offshore Brazil and tight oil formations in the United States. New
capacity from these areas, along with new supply from Iraq’s ambitious
planned expansion of output from its giant and relatively low-cost
fields could ease price pressures in the coming years.
Note to Editors: The
elements of the “demand shock” that sent oil prices surging and peaked
in 2008 is examined at length in chapter eight of Yergin’s latest book, The Quest: Energy, Security and the Remaking of the Modern World.
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