NEW YORK World oil prices are unlikely to rise much even as the global economy rebounds, Oil Analyst Ed Morse writes in the next issue of Foreign Affairs.
Oil prices are unlikely to go above $75 to $85 a barrel, as world output capacity rises and demand stagnates after oil prices spiked to a record $147 last year, Morse, the managing director of LCM Commodities, writes in Foreign Affairs' upcoming September/October issue.
OPEC kingpin Saudi Arabia has massively increased output capacity, which could help keep oil within the $40 to $75 a barrel range Morse claims is desirable for the Kingdom.
"There are good reasons to believe that lower prices are here to stay for a while," writes Morse. "Last year's high prices and the recession have severely damped demand, and the growth of new production capacity, especially in Saudi Arabia, is buoying supplies."
"Saudi Arabia appears to want to keep oil prices between $40 and $75 a barrel in order to promote global economic growth and limit the revenues of rival producers while nonetheless adequately funding its own budget."
Morse's forecast for little or no price rebound diverges sharply from banks, including Goldman Sachs, which see surging demand and scarce supply pushing oil prices back near record levels.
As consumers scale back consumption, global oil demand will probably grow 1 to 1.3 percent a year, versus a growth rate of 1.5 to 1.8 percent last decade, wrote Morse, a former U.S. State Department energy official.
"One extraordinary lesson of the last 60 years is that after every spike in oil prices, demand growth flattens considerably."
OPEC's oil production capacity is expected to rise to a record of 37 million barrels a day next year. The growth is led by Saudi Arabia, where capacity has already expanded by 32 percent to 12.5 million bpd since 2002. The Kingdom could add another 1 million bpd within 12 to 18 months, Morse writes.
Led by Saudi Arabia, OPEC probably holds 5 to 7 million barrels a day in idle production capacity, Morse said in a phone interview on Thursday.
Recently lower oil prices and demand haven't led to the decline in non-OPEC production that some had expected, he said. Oil output in Russia and the United States are both rising this year, he said.
Saudi Arabia's willingness to use its spare capacity to keep oil prices lower should prompt the U.S. administration to "reinvigorate" its relations with the Kingdom, instead of "aggressively seeking to end oil imports to the United States from the Middle East," Morse writes in Foreign Affairs.
(Reporting by Joshua Schneyer; Editing by Lisa Shumaker)