Oil may drop below $22 despite recent surge

Moch. N. Kurniawan, The Jakarta Post, Jakarta

The average international oil price this year would likely drop below the 2002 state budget assumption of US$22 per barrel despite the current surge in the price of the commodity, according to the director general of oil and gas Rachmat Sudibyo.

Rachmat said on Tuesday that the average oil price would remain low this year due to the global economic slowdown.

"It's quite hard to achieve (average) oil prices of $22 per barrel. The world oil demand will remain sluggish as the global economy is not really improving," he told reporters.

He cited the tedious economic revival of the two major oil importing countries, the U.S and Japan.

Industrialized nations suffering from the current global economic slowdown may also exert pressure to prevent oil prices from rising, thereby avoiding a negative impact on the recovery process of their economies.

Indonesia relies heavily on oil export revenues to finance its state budget. This year, the government has targeted some Rp 59.68 trillion (around US$6 billion) in revenue from the oil and gas sector.

According to one estimate, there would be a potential loss of around Rp 5 trillion per year if oil prices fell by only $1 from the 2002 budget assumption of $22 per barrel.

Oil prices have plunged to as low as $16 in the wake of Sept. 11, a tragedy that has exacerbated the global economic slump.

This situation has forced the Organization of Petroleum Exporting Countries (OPEC) and several non-OPEC countries to cut their output to help raise oil prices, but the move only pushed oil prices to around $20.

The U.N. Department of Economic and Social Affairs said that the world economy would see 1.5 percent growth this year compared to 1.3 percent last year.

It forecasted the oil prices to remain at about $20 this year from an average $24.5 in 2001.

Rachmat, however, said that unexpected world political upheaval such as the growing tension between the U.S. and Iraq could push oil prices up.

In London on Monday, oil prices hit a six-month high, with a barrel of benchmark Brent North Sea crude for April delivery as high as $24.05 at one point.

The oil price spurt was sparked by fears that Iraq, one of the world's major oil producers, was developing weapons of mass destruction, which has increased the risked of U.S. military action against Saddam Hussein's regime.

Rachmat added that the government would closely monitor the recent development of high oil prices to calculate the impact on government revenue and oil subsidies.

Meanwhile, OPEC welcomed on Tuesday the surge in world oil prices, but warned that the hike does not reflect market fundamentals and urged continuing output discipline.

The warning came as the 11-member cartel's own benchmark crude price rose back up into the cartel's target range for the first time since last September.

The price, used by the 11-member organization to set its production policy, rose to 22.44 dollars on Monday, according to OPEC secretariat calculations.

An OPEC source was upbeat on the price surge, but warned it may not last since it was based largely on concerns about Iraq.

"It is good for us, but it does not reflect the actual market conditions. It's all about psychology, its a reaction to the rumors of military action in Iraq," said the source, requesting anonymity.