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Oil prices have been rising sharply.
Just last week, prices hit 40 US dollars a barrel, the highest
level reached in more than 13 years.
As a result, jet fuel prices have also been affected and
several airline companies have already introduced surcharges
on its fares.
Yvonne Gomez spoke to Nizam Idris, Deputy Head of Research
at IDEAGlobal in Singapore, and why fuel prices have risen.
NI: It s a combinations of supply, demand and reserves. I
think in the beginning, when global economic growth reached
a level that we re seeing now, obviously global demand for
oil would increase as well. Just to give you an idea of how
much this increase has actually taken place over the last
year & China's demand for oil, for example, is now about
7% of total global demand, which is around 5.6 million barrels
a day. And Indonesia, for example, only produces 1 million
barrels a day. So, in other words, China's oil demand accounts
for 5 times that of Indonesia's supply. Also, in the recent
past, there've been numbers released by oil suppliers like
Shell, which said that it actually overstated its reserves.
Turning to airline companies, a number of them, like QANTAS
and British Airways, have been quick to translate this to
ticket surcharges. What do you think will be the impact on
the aviation industry, that hasn't fully recovered from the
events of September 11 and SARS?
NI: I think the aviation is looking at a big structural change,
with a combination of security concerns and we re now looking
at high oil prices. We're also looking at the widespread emergence
of budget airlines. So those sorts of changes are likely the
profitability of incumbent companies like Singapore Airlines.
Apart from a direct impact on airline companies, what are
some industries that will suffer from this rise in fuel prices?
NI: In general, manufacturing industries will actually be
affected by this, given the fact that energy costs have increased
quite significantly in recent months. Energy costs would actually
be translated into cost of production, and this can be benignly
pushed on to consumers without seeing any impact in the total
demand for goods, which is one question you have to be concerned
about. At the moment, global demand is very strong for anything,
basically, particularly in electronic products, which is an
indication to producers that they can pass on costs to consumers.
Prices are rising globally.
Earlier, you mentioned Shell and its earlier overstating
of the status of its reserves. How serious is something like
that in trying to assess supply and demand issues?
NI: I think this question about reserves is a tricky one,
because Shell is a listed company and therefore, it has an
obligation to announce its reserves, and yet it could hold
back this discrepancy for quite a long time. One can come
to the conclusion that the problem is greater in the case
of countries, like Saudi Arabia and all the other oil producing
countries. They are not obliged to report their reserves in
any way. Most of the reserve numbers that are mentioned, for
example, 260 billion barrels in reserve announced by Saudi
Arabia, they are all not accounted for by independent valuers.
So it s actually a big problem.
What are some factors that could see fuel prices either increasing
again, or maybe even decreasing?
NI: The three factors that have caused this rise in oil price,
that I mentioned earlier, strong global growth, supply-side
concerns and discrepancies in reserve numbers. These are the
same three reasons that will have an influence on oil prices.
In the event that OPEC were to agree to increase production,
for example, the question then is whether they have the capacity
to increase production sufficiently to push prices lower.
I think for now, the upside is still only dependent on growth,
and how the US and China can slow down their economies without
affecting growth altogether, and whether there s going to
be a soft-landing. If there is a crash-landing in either one
of these big countries, we might actually see a rapid dip
in oil prices too. There are quite a number of variables in
the equation and these variables are very difficult to predict
at the moment.
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