Estimating A Worst-Case Scenario For Oil
One way to estimate what a
complete destruction of Iraq’s oil fields would mean for global oil prices is to perform a
rudimentary calculation of the nominal values for the supply and
demand of oil…
Supply
According to the Paris-based International Energy Agency (IEA),
the world, including Iraq, produced 27.2 million barrels a day in February. And
due to the continuing rebound in Venezuela’s production–after the massive
strike by oil workers–coupled with the expected increase in
output from OPEC’s other members, total oil production in March is expected to
exceed 28 million barrels a day.
Iraq
Iraq typically produces between 2 million and 2.5 million barrels a
day. And if we subtract this amount from the 28 million barrel a day average,
the net supply for March and April should equal about 25.5 million barrels a
day.
Demand
According to the IEA, current daily demand for oil is about
24.5 million barrels a day and should decrease slightly over the next two
months, as demand for oil is typically at its lowest in this, the second
quarter. However, demand for oil usually picks up significantly in the third
quarter, which might put some upward pressure on oil prices–assuming no Iraqi
production.
Net
The net difference between estimated supply and demand leaves
the market with a 1 million barrel a day surplus–not to mention the combined
1.5 to 2 billion barrels of oil in global, strategic oil reserves that can be
used to offset any imbalances. It can therefore be concluded that the world’s oil supply will be able to meet demand until the third quarter, should Iraq be
unable to contribute.
The markets will undoubtedly be closely watching the
price of summer oil futures as a good indicator of how this relationship will
unfold.
