Arab Petroleum Investment Corporation Argues Against IEA on Oil Price Increases

A Saudi-based oil investment group has argued against the IEA’s projection that the current oil prices may rise higher to reach a per barrel oil price of $150 in the coming five years because of increasing costs and insufficient energy investment.

Arab Petroleum Investment Corporation, an OPEC affiliate, detailed its views in the recent monthly commentary.

According to the group, international policy advisory institutions’ recent studies have suggested the possibility that too much supply growth constraint may push current oil prices even higher in the long-term compared to what was assumed before.

It mentioned in Vienna IEA’s study that with the continuous socio-political conflict in North Africa and the Middle East, a lack in the upstream sector’s exploration investment may change output to higher priced resources, leading per barrel oil prices to sharply increase to $150 within the coming 5 years.

Apicorp has reported the same trends, and even said that increased oil prices will incite more technological advancements that may enhance inventories. This is the IMF’s case, which has also empirically analyzed its global oil market model covering both the technological and geological view to project a permanent doubling of oil prices per barrel to $200 within the coming decade.

Apicorp stated that oil exploration and production is dependent on politics as a strong policy motivator. In several major oil producing nations, those policies have been quite limiting, in terms of taxation or access.

On the other hand, motivated by supply security concerns, the policies of major consuming nations have been generally proactive. While these countries tend to enact tight environmental policies, fiscal rewards and proper financing conditions have highly contributed to increasing output and investment.

Cost inflation is a main factor in determining if a project is economically feasible. The observed increase in energy projects’ cost – by almost three times over the past decade – has been primarily due to growing costs of input factors, project risk premiums and contractors’ margins. But that trend will not likely continue.

According to Apicorp, as the industry keeps experimenting with fresh technologies and works on introducing new contracting methods for handling huge scale projects, the learning curve is expected to shorten and costs reduced.

In summary, marginal cost is difficult to predict because of the joint effect of many uncertain factors. However, uncertainty doesn’t explain the expectation of increased costs.