Courtesy of The Wall Street Journal, an interesting article on how oil prices will be affected as countries such as Brazil, Russia, Nigeria and Kazakhstan increase their oil output, which some industry observers have coined as part of an acronym for the next: BRINK, or Brazil, Russia, Iraq, Nigeria and Kazakhstan.  As the article notes:

“Ten years ago, U.S. Energy Secretary Bill Richardson was hinting at a potential release of oil from the country’s strategic reserves to cool prices, then at the heady level of $25 a barrel. As 2009 draws to a close, many regard Friday’s price of $69.87 as a buy.

Surging demand from countries like Brazil, Russia, India and China trashed prevailing wisdom. The BRIC nations accounted for 61% of demand growth over the past decade, according to the International Energy Agency.

As important, however, was a squeeze on supply. The Energy Policy Research Foundation has estimated disruption caused by factors like war and resource nationalism lowered potential global output by between 2.5 million and 4.5 million barrels per day in the second half of this decade. That is a lot when you consider OPEC’s buffer of spare capacity fell below two million barrels per day by mid-2008, when oil prices peaked.

A loosening of supply constraints is the major risk to the expectations of a rebound priced into oil futures, especially as demand growth will likely prove lackluster.

The average size of discoveries has been 35% bigger this year compared with last, according to IHS Cambridge Energy Research Associates.

Meanwhile, in a nod to the BRIC countries that helped define the last decade, consultants PFC Energy has coined its own acronym for the next: BRINK, or Brazil, Russia, Iraq, Nigeria and Kazakhstan.

Brazil has hosted a string of big discoveries, while Russia has defied expectations by overtaking Saudi Arabia’s output. Kazakhstan is expanding three major projects, while a tentative peace is allowing Nigeria to start raising output.

The wild card is Iraq, where more licenses for foreign oil companies were awarded Friday. Contract terms encourage firms to maximize output quickly. Winners to date aim to boost output from five fields 12-fold to 8.5 million barrels per day.

Given Iraq’s fragile peace and ravaged infrastructure, that looks unrealistic. But even if production increased by a more conservative 1.5 million barrels per day by 2015, it could pressure oil prices through unsettling the organization Iraq helped found 39 years ago: the Organization of Petroleum Exporting Countries.

OPFC projects the world will require an extra 3.2 million barrels per day from OPEC by 2015 to meet demand. Leaving aside the fact that effective spare capacity is already 5.4 million barrels per day, Iraq’s increased production would take up more than half of the extra amount required.


OPEC will have to reintegrate Iraq into its quota system eventually. Other members, which have benefited from Iraq’s weakened output for years, will be expected to limit their own to make way.

The cartel is struggling to maintain discipline as it is. Compliance with quotas hit 58% in November, down from 83% in March, the IEA says. Many members have large development needs. If sovereign-debt concerns ripple out from places like Dubai to squeeze foreign investment elsewhere, the temptation to pump more oil for cash will increase, pressuring prices.

What’s more, Iraq’s grandiose targets reflect its vast reserves and thirst for recognition and funds. It will likely demand a bigger quota than its old pre-Gulf War level of 3.1 million barrels per day.

Saudi Arabia, which maintains a large buffer of spare capacity already and whose public finances can better withstand a lower oil price than rivals like Iran, will likely bridle at taking all the pain of accommodating Iraq. It is worth remembering that when oil prices collapsed in 1986 after the second oil shock, it was due to a combination of competing supplies, lackluster demand growth, and a breakdown in OPEC cohesion.”

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