MercoPress. South Atlantic News Agency

World in grip of third “oil shock” and no easy way out

IEA Executive Director Nobuo Tanaka

Oil supplies will remain tight despite record prices that have reduced demand and the world is in the grip of its third “oil shock”, according to the International Energy Agency report released this Tuesday in Madrid.

IEA, the energy watchdog for the Organization for Economic Cooperation and Development predicted that oil supply will exceed projected demand by 2 million barrels per day, which is considered a thin cushion. In its annual Medium Term Report, IEA said the world estimated daily oil needs would rise from 86.87 million bpd this year to 94.14 million bpd in 2013 â€" less than it anticipated last year, because of skyrocketing prices. The agency said there will be 1.4% less demand this year and 3.43% less in 2012, the last year for which the report gave figures. Nevertheless as Western nations cut back, China and other emerging economies will consume more crude, the IEA pointed out. "We are clearly in the third oil price shock," said IEA Executive Director Nobuo Tanaka. The first oil crisis struck in 1973 when Arab states declared an oil embargo. The second began in 1979 following the Iranian Revolution. However this crisis is "different". "Those price peaks forced consumers into saving oil" and oil companies to look for new wells, he said, but now "the biggest energy savings have been made (and) ... the easy oil outside (of) a few countries has been found." Tanaka expressed surprise that record prices had not curtailed demand. The price for a barrel of oil surged past 143 US dollars for the first time ever Monday. Light, sweet crude for August delivery settled at a record 140.97 a barrel on Tuesday in New York. Since the IEA's 2007 report "which forecast severe supply tightness emerging ... oil prices have doubled and we have seen the start of economic slowdown spreading throughout the world," Tanaka said. "The shock was that ... while demand was revised down ... supplies have also been revised down sharply." "Day-to-day market noise can be driven by speculators" Tanaka told reporters but "high oil prices are driven by fundamentals". The IEA report states that "oil demand remains concentrated in developing economies, with 90% of growth spread between Asia, South America and the Middle East". The IEA warned against seeking a "simplistic explanation," for record oil prices. Among the factors listed by the report as leading to price spikes were: i) low spare capacity from OPEC; ii) geopolitical concerns, including unrest in oil-producer Nigeria and tensions over the nuclear ambitions of Iran, OPEC's second-largest producer. iii) possible excess stockpiling by refiners and tight refining capacity; iv) expectations that prices will rise due to fears that supply might have peaked and recognition of powerful economic growth by developing countries; v) strong forward refining margins, which may have encouraged stock building by refiners looking to make profits. The report also predicted that underproduction from non-OPEC producers will continue over the next five years â€" a trend that may additionally act to lift prices. Summing up, the report said that "strong underlying demand growth" from developing nations, "poor supply growth, low spare capacity, a weaker dollar and a mismatch between refinery capacity and the structural growth in product demand" have all contributed to oil's meteoric price rise.