Increased oil supply may not lower prices

14-Jun-05

Oil prices have been escalating since the past 12 months and seem to be stabilizing at around US$50-54. After years of slow investment in capacity across the upstream production and downstream refining industry sectors, last year's demand boom led by China took producers and refiners by surprise. It has become evident that it is the lack of refining capacity worldwide and not supply that is driving oil prices up. OPEC producers, scheduled to meet in Vienna tomorrow are ready to raise oil output limits. Leading producer Saudi Arabia was joined by Nigeria and Indonesia in backing a proposal by Kuwait for an increase in supply limits of 500,000 bpd - 2%. However it seems that OPEC, operating close to full crude production capacity, is struggling to restrain prices and can do nothing to combat a global pressure on transportation fuels (diesel, heating oil and jet fuel). Are refinery bottlenecks to be blamed for high fuel costs? The scenario seems poised to iron out these bottlenecks as OPEC members like Saudi Arabia ploughs US$50 billion into rebuilding its cushion of spare production capacity and upgrading its export refineries.