Two Explanations for Surging Oil Prices

Here are two European insights on current developments in the price of oil. One is from Barclays and the other by Chris Skrebowski who maintains a list of global oil fields under development (megaprojects) and edits Petroleum Review. The reports are in close agreement.

The Oil and Gas Journal (2/11/08) reported that Barclays Capital, the investment banking arm of Barclays Bank, PLC has issued a report on the broad outlines of the current market for oil. Their conclusion is that, “The rise in prices has been less about anything happening in a dynamic fashion to push prices up …[than] The failure of of rising prices to loosen global [supplies].” Demand is increasing steadily from China, Saudi Arabia, and India, in that order and is expected to continue that way.

Barclays expects demand in 2008 to grow by 1.7%, up from 1.2% in 2007. They do not believe economic weakness in the U.S. and possibly EU will be sufficient to dent the growth of the developing economies. “…almost half of global [oil demand] growth in 2007 came from a region [the Middle East and Russia, I presume] where the direct short-term linkages to the OECD…[are] weak.”

Skrebowski reinforces Barclays’s views by pointing to current inventory tightness. He says, “Between July 2007 and December 2007 OECD oil stocks went from the top of the five-year range to the bottom…Forward supply has slipped from 55 days to 51 days in just five months…in 4Q07 the stockdraw was running at 1.1 mn b.d according to the International Energy Agency [EIA]. If stocks are not rebuilt to more comfortable levels, price spikes and supply shortfalls become much more likely.”

He goes on to point out that OECD oil demand has been slowing steadily since 2005, but that OECD oil production has been slowing even faster. Thus, OECD demand for imports is increasing despite its reduced use of oil.

Skrebowski contrasts OECD attitudes toward oil and free markets with those of oil exporters who believe in subsidizing their domestic oil price so that consumers do not experience the economic motivations of the free market as seen in OECD countries. This is one reason for the rapid increase in domestic oil demand among oil exporting countries that is cutting into the availability of oil on the export markets. He sees little indication that this oil price subsidies will stop in the near term. Subsidies are also in place in high-growth countries that do not export oil, such as China.

“The conclusion is that we now have an oil world in which the impact of high oil prices is only really felt in the OECD countries where demand is already falling.”

Skrebowski’s sense that oil inventories are tight in the West is interesting from a couple of viewpoints. First, Matt Simmons and Charlie Maxwell seem to confirm Skrebowski’s view. They have been saying that inventory reductions during the past few years is one way that oil demand and supply have been balanced.

Secondly, OPEC has been justifying the maintenance of stable production levels by saying for some time that “markets are well supplied,” referring to OEDC markets. Well, that does not seem to be quite the case according to Screbowski, Simmons and Maxwell.

All of this makes one wonder if the OPEC countries are actually in a position to increase their exports or if they are covering up an inability to increase supplies by saying that action is not needed. Now that OPEC has adjourned until next September, it may be well into the Fall until we find out more about the truth of this matter.

Comments

[svkoho:]

highly informative, data filled rather than opinion filled. Mention could have been made of analysists who are even now predicting prices plummeting to $70. This piece seems to contradict that.

2008 Mar 07 10:44 AM

[User 161473:]

Great article!!!!

Here is a list of people who think we have a problem with production, all of these people think it will be very difficult to get above 100 millon barrels a day, most think we won't even get above 90:

1)Jim Mulva (CEO Conoco Philips)
2)Christophe de Margerie (CEO Total)
3)Jim Buckee (CEO Tailsman Energy)
4)Faith Brohil (Chief Economists IEA)
5)Salad Al-Huseni (Former Head of Production Saudi Aramco)
6)James R. Schlesinger (Former Head of CIA)
7)Franco Barnabe (CEO of ENi Italy)
8)Mike Bowlin (Former CEO of ARCO)
9)Helge Lund (CEO Statoil Norway)
10)Chokri Ghanem (CEO Libyan NOC)
11)Jeroen Van der Veer (CEO Shell Oil)
12)John Hess (CEO Hess Energy)
13)Rick Wagoner (CEO General Motors)
14)Robin West (CEO PFC Energy)
15)Richard Branson (Virgin)
16)Vagit Alekperov (CEO Lukoil)

2008 Mar 07 11:10 AM

[Jason Rines...:]

The only silver lining in this cloud is that the U.S. market will be forced to become energy independant. The shame is we'll probably see a depression first. My belief is that we have plenty of global supply for the next forty years giving us plenty of time to develop alternatives, but in between the American consumer is going to keep paying through the nose.

2008 Mar 07 11:18 AM

[Iconoclast421:]

It is precisely the increased demand for oil in exporting countries that is going to cause the biggest problem. There are two current case studies... UK and Indonesia, where it only took half a decade for those two countries to become net importers, once they reached their peak in exports. This is extremely solid data, evidence that might have been helpful 10 years ago. At this point in time, nothing in the pipeline can avert what can only be called an apocalyptic disaster. There will most likely be a die off. The only question is how big will it be before people start taking the problem seriously? We need 1 terawatt of new solar power to come online within 5 years, and an equal amount of wind power, AND a 50% increase in fuel efficiency stateside, across the board, in order to avert long term disaster. Do you hear any of the CFR candidates talking about this? Hell no. People need to figure out that it is the stated goal of the CFR to, literally, kill you off.

2008 Mar 07 01:39 PM

[Fred Swartz:]

@ User 161473
That's an impressive list of famous people. BUT it raises some questions. First, what is the source of this list. Second, you've omitted the list of the nay-sayers - could it be even larger? And finally, the judgment of some is quite suspect (eg, Rick Wagoner seems to build cars as if he believed otherwise).

Not that it's wrong, but this list without documentation or balance feels like hype rather than help.

2008 Mar 07 02:13 PM

[Sebrock:]

5)Salad Al-Huseni (Former Head of Production Saudi Aramco)

I'm pretty sure I read an editorial by him in the NY Times or WSJ that said the exact opposite. Are you sure this list is right?

2008 Mar 07 03:03 PM

[User 161473:]

Hi Fred S,

Here are some website addresses for documentation of these people’s thoughts on possible production limits. It is fairly easy to look on Google to find if any of these people have ever made comments about production limits. One of the websites is from David Strahan who is a reporter in the U.K.. Another good website is www.energybulletin.net....

I wasn't trying to give a fair and balanced arguement. There are hundreds more nay-sayers than the people who believe we have a production problem, the list would be huge. If we had more people that believed in peak oil we would see a fundamental shift in energy policy....and it is starting to happen

1)Jim Mulva (CEO Conoco Philips)
blog.foreignpolicy.com...

2)Christophe de Margerie (CEO Total)
www.davidstrahan.com/b...

3)Jim Buckee (CEO Tailsman Energy)
www.energybulletin.net...

4)Faith Brohil (Chief Economists IEA)
energybulletin.net/313... and independent.co.uk/news... www.davidstrahan.com/b...

5)Salad Al-Huseni (Former Head of Production Saudi Aramco)
www.davidstrahan.com/b... Listen to audio
www.nytimes.com/2005/0... Page 8

6)James R. Schlesinger (Former Head of CIA)
globalpublicmedia.com/... trascript U.S. senate committee

7)Franco Barnabe (CEO of ENi Italy)
www.greatchange.org/ov...
sandersresearch.com/in...

8)Mike Bowlin(Former CEO of ARCO)
www.energybulletin.net...
www.oregonpublichealth...

9)Helge Lund (CEO Statoil Norway)
www.dn.no/forsiden/ene... need to change to english

10)Shokri Ghanem (CEO Libyan NOC)
www.energycompass.com/... click on the presentation

11)Jeroen Van der Veer (CEO Shell Oil)
www.energybulletin.net...

12)John Hess (CEO Hess Energy)
www.pennenergy.com/dis...

13)Rick Wagoner (CEO General Motors)
www.energybulletin.net...

14)Robin West (CEO PFC Energy)
www.davidstrahan.com/b... Listen to audio

15)Richard Branson (Virgin)
www.davidstrahan.com/b... Listen t

2008 Mar 07 06:03 PM

[JRip:]

The Hess Oil company sent me the official text of the speech Jphn Hess gave at the Feb 12, 2008 CERA conference.

Here are some quotations:

Given the long lead times of at least five-to-ten years from discovery to production, an oil crisis is coming -- and sooner than most people think. We need to act now. Unfortunately, we are behaving in ways that suggest we do not know there is a serious problem. It is imperative that we change our mindset, our sense of urgency, or the consequences will be severe.

++++
On the Demand side:

In the developing countries of the world, the problem is worsening with the fast-growing demand for transportation. Currently, China and India have only one registered vehicle for every 100 eligible drivers – compared with 114 vehicles for every 100 eligible drivers in the U.S. Goldman Sachs has estimated that by 2050, the number of cars in China could rise to 500 million and in India could rise to 600 million. That’s 1.1 billion vehicles in two countries that three years ago had fewer than 20 million cars total – creating an overwhelming increase in the need for automotive fuel.
+++
Recessions may interrupt this growth, but only temporarily.
+++++

On the Supply side:

First: exploration. Since 1980, discoveries have not replaced our annual global crude oil production. Discoveries are getting smaller and located in more difficult environments, such as the deepwater Gulf of Mexico, Brazil and West Africa, where companies are now drilling in water depths of up to 7,000 feet and searching for targets that are in some cases more than 30,000 feet deep
+++
It is a real concern whether the countries outside of OPEC can play as much of a role in production as they did in previous years. U.S. production peaked in 1970. The North Sea peaked in 2000. Mexico peaked in 2004.
+++
more later

2008 Mar 07 09:47 PM

[JRip:]

Challenges listed by John Hess:

Firstly, in terms of demand, we need to make significant progress in conservation. The growing population of hybrids and an overall improvement in automotive miles per gallon is helpful, but we need to spend more money on research to make hydrogen fuel cell vehicles a commercial reality so that the average fuel economy of a new passenger car could increase to the equivalent of 80 miles per gallon or better.
+++
In all these conservation efforts, the United States, the nation with 5 percent of the world’s population and 25 percent of its oil consumption, needs to take the lead by continuing to encourage fuel efficiency and improvement in mileage standards while driving for a technological breakthrough.
+++
We think that, given the long lead times from investment to production, the current sum that both OPEC and non-OPEC nations are investing is far below what is needed to ensure sufficient production for our future. Our overall investment needs to grow significantly from current levels – and the sooner the better. Without that, the models that we have put together suggest that with oil demand growing 1-to-1.5 million barrels per day each year, global crude oil supply capacity will fall short of global demand between 2015 and 2020.
+++
An oil crisis is coming – in the next 10 years. That means we need to act now to avoid this outcome. It is not only a matter of demand. It is not only a matter of supply. It is both.

2008 Mar 07 11:03 PM

[Robert Prit...:]

You might just want to listen to Lindsay William's experiences in Prudhoe Bay...

peswiki.com/index.php/...

2008 Mar 08 11:11 AM

[Bhakta:]

Good article and good comments. I read "The Peak Oil Review" weekly for several years. It is full of expert analysis and discussion, and weekly news on all energy related subjects. When I hear some people say that there is no peak oil, and prices will fall back to the $50 range, I wonder who is paying them to say this? Are they trying to scare off some shareholders so they can buy in for less?

There is not enough discussion on how oil, priced in dollars, has not changed anywhere near as much for those who get their income in Euros, Pounds, Swiss Francs, Indian Rupees, Thai Baht, etc. It is the weak dollar that is creating the spike in oil prices, not the oil itself. Were the $$ go back to being worth what it was in 2000, then I would bet the price will come down too.

2008 Mar 08 11:20 AM

[Robert Prit...:]

Lindsay Williams Experiences - Since the link was cut off, try this;

Go to www dot peswiki dot com
Using the Search button there, look for "Energy Non-Crisis".

Or copy/paste the link shown above in the previous comment in your browser

2008 Mar 08 11:29 AM

[NOWHEREMAN:]

In reality, the Mideast is increasing its internal usage of oil far faster than China...take a look at the infrastructure in Dubai.

Does anyone really think the other kingdoms are content and will sit idly on the side while Dubai takes center stage in the region.

I hate to say it but I am starting to believe the Nuclear Plant in Iran IS for domestic power. But Iran cannot admit that in a few years, it will cease exports because of internal consumption demands. So it is trying to conceal this fact with FACE saving sabre rattling.

2008 Mar 08 01:38 PM

[jt:]

Good article and good comments. I've read both "sides" yet to be perfectly honest, they are not at ALL comparable. The Peak Oil side uses data...the opposing side uses arguments. An overgeneralization, perhaps, but in my experience, the more people look into the facts, the more they come out on the side of Peak Oil and impending oil armageddon...oil wars...and at the least shortages.

And I agree 100%...the CFR is an organization that does not give a crap about you as an American or other citizen. You are cattle...and once your usefulness, read taxable value, is gone, best for you to be gone as well. Best be thinking outside of the proverbial box...the Time is approaching fast...and one day it will have arrived. Ready? jt

2008 Mar 08 02:10 PM

[sbenard:]

Great comments all! Very lucid and I appreciate that the various viewpoints are cordial, too!
My thoughts:
There is more oil sitting off the Atlantic coast of the United States than in all of Saudi Arabia. However, realistically, between the global warming fans and the lack of political will to drill there, the United States won't be increasing its domestic supply until a true crisis hits -- like a world war or depression -- at which point it may be too late.
I am personally convinced that the best solution is a crash program to increase domestic oil production combined with a second crash program to put solar-electric panels on every home, apartment building rooftop, and office building in America, and the same for wind turbines. I was looking at a power pole the other day, and I thought, "What if we put a solar panel on the side of that pole and a wind turbine on the top? And then multiplied that times every power pole in America?"
I am personally opposed to nuclear energy because the long-term waste storage is a nightmare, and it wouldn't be fair to force one or two states in the desert Southwest to become the nuclear waste dump for the country. Nuclear energy, in my opinion, is only viable if the waste solution is part of the nuclear development project, and it must be stored locally, not cruelly dumped on the citizens of a few states.
I guess what I'm really suggesting is that a true solution must be broad-based, combining more domestic oil with renewable energy. One or the other is an incomplete solution and a certain disaster that we can't bear to wait any longer for. Unfortunately, I just don't see this solution coming! Therefore, we'd better be prepared for energy armageddon!

2008 Mar 08 03:10 PM

[sbenard:]

By the way, could someone please tell me what is "OECD"? Does this refer to the oil IMPORTING countries? Or is it the Organisation for Economic Co-operation and Development, an international organisation of thirty countries, that accept the principles of representative democracy and a free market economy?

2008 Mar 08 03:14 PM

[Ames Tiedeman:]

I expect oil to hit 120 in 2008 and then pull back. Over the next 5 years however I think we are looking at 150 oil or higher. Longer term how can it not go even higher? It is a finite resource.

2008 Mar 08 04:44 PM

[Warren B. M...:]

How about the obvious- the Saudis are acting as swing producer, posting price (aka setting price) and letting quantity pumped adjust.

It's a simple case of a monopolist (at the margin) setting price. They did this in the 70's and it didn't stop until opec production was cut by 15 million bdp in the early 80's in an attempt to support the price. But net supply was larger than that and the Saudis were forced to 'hit bids' rather than get their 'offer lifted.'

Today they are back in the driver's seat, getting their offer lifted at any price they wish to post. Operationally, they post prices with their refiners. They don't sell in the spot market.

Yes, they deny they are setting price, but as a point of logic they have no choice.

2008 Mar 08 10:10 PM

[insideoil:]

Slowly the light dawns - how long does it take to recognise a negative trend - it seems forever - until it hits you hard enough.
3 sets of analysis are still missing for me.
a) total liquid hydrocarbons - supply & demand
b) total energy supply/demand - with an estimate at what price, switching will occur and in what applications/energy supply media, and
c) countries listed by demand level that subsidise oil prices - with an estimate of own supply.
The first will give an idea of what can be used short term to fill growth gaps, the second the longer term position, and the third to identify where ongoing growth will not be impacted by price change -so determining the completely inelastic high growth part of the demand.
I/m not smart enough - or do not have time enough - to do this work, but I think the results ( if actually obtainable) will tell the scary tale.
I personally believe there is plenty of energy available - the only variable being the cost of investment, extraction and delivery - with the cost not always being in money. Non-money factors are attitides to CO2 emmission generally, environmental managment of nuclear waste, and "clean" processing of "dirty" coal. Wind and solar can never make up the gap (time, availability of resources, and lack of scale make this impossible) - but will still help. Even if OPEC can encourage its memebers to increase demand - face it - there is little incentive for them to do anything else but manage their resources for the longer term.
The lack of certainty over the "elasticity" of demand in the first world is only an excuse for delaying investment - as it is always taken as the first cure to the problem. For a start - much of these savings on demand have been made already, and for seconds - its not where the growth problem exists.
The article above - in my view- has started to capture the rapidly growing collective wisdom that the energy problem has shifted, both in cause and in cure. Let us see the real bankers step up to the plate to get the real investing done in real projects for a real demand for real people.

2008 Mar 09 12:25 AM

[LJ:]

Don't forget that dollar is now falling like snow. You cannot keep buying goods from other countries at a discount, while your print press is still operating at full gear. It is very unfair for other countries whose currencies are undervalued.

2008 Mar 09 04:15 AM

[Tex:]

Good analysis and comment......

But let me first ask this question......how many of u fellas are americans? how many of u guys actually works in the sector (Oil and gas) ? .
It really shocks me when i see americans discussing about issues so straight forward and they either pretend they dont know or just choose to ignore the facts....... how many of those guys that have made comments on peak oil coming are actually suffering from the drammatic increase in crude prices? the last time i checked they have all benefitted from it....and its only rational for them to sell their interest (Human Nature).... if i may..........how many people in the texas elite went bankrupt after the first oil boom that ended in the 80's, how many of them are friends to your president(Bush) and cheney/

Dont get me wrong ........am not saying the waste should continue....i remember we use to get really angry in the late 90's knowing you guys pay less to fill your SUV's than us in the middle east. but the truth is this ......the way you guys allow people to run your country based on personal interest has a lot to do with what is happening............w... do you expect people like Mathew Simmons to say.....tell his IB clients tht oil is abundant ......this guys earns there money based on the dollar value of the transaction......try read less into what this guys say...am not saying they are completely wrong but remeber objectivity is one of the most difficult things to acheive in life.

2008 Mar 09 11:07 AM