AN ANALYSIS OF THE GLOBAL
MAS undertook a study of the
global crude oil market in 2004, against a backdrop
of a rapid increase in prices to record highs to above
US$50 per barrel (see Chart 18). We found that the price
increase can be explained by a combination of demand
and supply factors.
Apart from strong U.S. demand
in 2004, demand from China and India has also risen
dramatically (See Chart 19). While cyclical factors
were partly behind strong Chinese demand, structural
factors such as the shift towards energy-intensive heavy
industries and a rise in car ownership have also played
a part. In contrast to the early 1990s when China could
meet all its oil needs from domestic production, it
now relies on imports for over one-third of its requirements.
On the supply side, global oil production is now at
near full capacity due to a lack of investment over
the past two decades, which limits the extent to which
future supply could increase to meet any projected rise
in demand (See Chart 20). Other longer-term supply factors
driving up prices include higher production costs faced
by oil producers as a result of higher taxes and tougher
environmental regulations, as well as rising upstream
and transport costs.
Apart from demand and supply fundamentals, fears of
supply disruptions, such as those caused by saboteurs
in Iraq, have also resulted in a security risk
premium on oil prices. Speculators have also fuelled
part of the run up and volatility in prices.
In the short-term, the oil
market will remain volatile over events that could result
in supply disruptions. In the longer term, high oil
prices are likely to stay, albeit not at current levels.
On the demand side, the secular rise of energy-intensive
emerging markets, especially China, represents a permanent
positive shock to global demand. On the supply side,
capacity will remain tight in the next few years, as
new investments will take a while to come on stream.
For all these reasons, the long-term price of oil is
likely to rise significantly above the US$14 to US$22
per barrel range seen throughout the 1990s.