Oil market faces tight spare capacity for rest of decade

Oil market faces tight spare capacity for rest of decade: IMF

Singapore (Platts)--30Sep2004


The global oil markets look likely to face tight spare capacity for the rest
of the decade, as capacity additions take time to ramp up and are steadily
consumed by steady growth in demand, the International Monetary Fund said in
the September edition of its World Economic Outlook. The IMF, which releases
its world review twice a year, added that persistently high prices in 2004 and
2005 looked likely to shave just half a percentage point off world GDP
growth--not enough in itself to substantially curb oil demand growth. "Looking
forward, spare capacity in the oil market is expected to remain low through
the remainder of the decade," said the IMF report. "Consequently, with
terrorist attacks on oil supply a continuing risk, higher and more volatile
oil prices may persist. This underscores the need to reduce vulnerability to
such conditions, both through concerted measures to restrain the growth of oil
demand and through investment in capacity."

The IMF blamed the current shortage of available spare capacity on "stalled
investment" throughout the 1990s--a time when benchmark crude oil averaged
closer to $20/bbl, a far cry from the record $50 levels seen in recent days.
Moreover, the upstream industry remains somewhat slow to react to high futures
prices, it said. "Existing capacity expansion projects appear limited even
though futures markets suggest that crude oil prices will remain above the
minimum levels needed to justify additional investment," said the report.
While production capacity is set to grow by 1-mil b/d by the end of the year
on the back of expansion projects in Saudi Arabia, Kuwait, and United Arab
Emirates, "spare capacity is likely to remain tight because of a seasonal
surge in demand during the second half of 2004," it added. The IMF believes
that normal growth in demand will likely consume any additional capacity
coming on stream in 2005.

The IMF said that the global economy continued to shrug off record highs in
nominal oil prices, pointing out that global GDP growth in 2004 looks likely
to average 5%--the fastest rate of growth since the mid-1970s. Growth did slow
in the second quarter, it found, most notably in the United States, Japan, and
China. It cautioned that persistent spikes in the cost of oil present a slight
danger to world growth. "The balance of risks has shifted to the downside with
further oil price volatility a particular concern," said the report.
Nevertheless, high oil prices will hardly dent GDP growth under standard
economic models, it added. "Futures markets suggest that average oil prices in
2005 will be about $8 a barrel higher than in 2003; standard economic models
suggest that such an increase would reduce global GDP by about 1/2 percentage
point."

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