The Oil Story: Dallas vs. Indonesia 15 comments
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Dallas
As a relatively simple person, I tend to think of things in pure supply-and-demand terms, so for my tea leaves, I love charts like this one from the recent Dallas Fed prognostications. They put out a chart which, even if wrong, fills me with chart-porn simplistic glee:
Charts like this are just gorgeous in the depth of information that they project with so little ink. Whether the curves are correct or not, the important things are:
- The demand curve has shifted to the right
- The supply curve has shifted to the left
This is the textbook scenario for higher sustained prices. If you believe the basic premises behind the curves, $100 oil means either:
- Supply is completely constrained - not a curve, but a vertical line
- Demand is much more inelastic - more vertical, less curved
They go on to suggest four scenarios; two of which will drive prices higher, and two of which will push oil back under the magic $100 mark:
- Oil production reaches a plateau or peak-prices likely to rise further
- Oil nationalism continues to slow the development of new resources-prices likely to remain relatively high
- In a shift of strategy, OPEC increases its output sharply-prices likely to fall.
- Aggressive exploration activities pay off with the quick development of significant new resources-prices likely to fall.
Their somewhat rosy conclusion is that recent backwardation in oil is predicting that the last two scenarios win out. But this doesn't make too much sense to me, especially given the fact that backwardation has been bled out of the market since the Fed published the letter earlier in May. With the IEA jumping on the peak oil bandwagon and Crazy Uncle Hugo dealing with skyrocketing inflation and doing everything he can to continue his power consolidation, I don't see those two helping out anytime soon. So that leaves OPEC and exploration.
Indonesia
Indonesia is kind of the poster child for how crazy all four of the Dallas Fed's drivers are when faced with the real world. Last week, Indonesia pulled out of OPEC for the simple reason that they could longer hold up their part of the E - exports.
Indonesian oil has a long history. They were one of the first to join the cartel back in the ‘60s, and they used to be a big deal - as recently as 1998 they were pumping 1.5 million barrels per day; today, about half that. For years now Indonesia has actually had to import oil to keep up with demand, a situation made worse by a long-standing government subsidy on petroleum products. To coincide with the pullout of OPEC, the Indonesian government is also raising the price of gas, in a (likely vain) attempt to stabilize the government's deficit laden budget. It's still subsidized though: Gas is currently sold at 75% of its actual cost.
The bottom line is that Indonesia is running out of oil - "drying up" as Indonesian President Susilo Bambang Yudhoyono put it. You'd think with $100+ oil that there would be massive investment going on, but the world's oil companies may have learned a lesson. In country after country (Nigeria, Indonesia, Venezuela), issues of corruption, civil unrest or overreaching nationalism have burned the hands of big oil. How many times does Hugo Chavez have to beat up ExxonMobil before they just give up investing in the third world? So the idea that an economically crumbling, rapidly destabilizing Indonesia will be a fat target for investment seems farfetched. Exxon already couldn't break a deadlock on managing the Natuna natural gas field.
How different is the situation in other OPEC countries? Hard to tell, as all we can do is read the headlines. But given the gamesmanship and general dysfunction of OPEC, and the apparent inability of the cartel to get much more E out the door, I don't see where the Dallas Fed gets proved the smartest guys in the room. The fact that exports are down 2.5% in a year where prices rose 57% is a staggering denial of the idea that OPEC can slush the market.
Love the charts though.
P.S.: The second somewhat rosy (!) perspective from the Fed is this: At least we don't live in the 1800s! Americans aren't working as hard for their energy as they have in the past, if you go really, really far back. I know I feel better now.
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This article has 15 comments:
While oil may have gotten ahead of itself recently, it really is difficult to believe there are additional supplies anywhere that can help rescue us from HIGHER prices in the near to intermediate term. As you point out, nationalization has turned out to be a two-edged sword for producers, as well.
Although polls show American consumers have lately caught on to the strategy of the Congress denying us the use of our traditional domestic reserves in the name of promoting not yet developed alternative energy technologies (... a DANGEROUS game, as the auto, airline and trucking industries can already attest!), this trend shows no signs of abating, either.
In the face of these economic impediments, I'm AMAZED by the continued resilience of our economy to absorb this self-imposed oil, gas, coal and nuclear energy embargo. Indeed, it now appears the fat lady's going to have to sing loudly (... over what's left our once dynamic economic prowess) before we finally revert to our senses.
www.eia.doe.gov/emeu/s...
There has recently been a lot of discussion about how production has also fallen off in Mexico and Vanazuela, which has at least partially been attributed to lack of investment. I think what we are seeing in terms of US domestic production leveling off and now projected to increase demonstrates that there is oil to be found but to encourage exploration we are going to have to pay up to get it.
I think the announcement by GM that they are considering "Strategic options" with regard to the Hummer line speaks volumes. For a couple of decades now we have taken cheap energy for granted and our consumption had become an unsustainable bubble just like commodity prices are currently enjoying. Our consumption finally reached a point that with a little push from demand elsewhere caused prices to spike.
Capitalist markets will always seek an equillibrium but in the process they are usually given to radical swings in either direction as resources are reallocated more appropriately. In another twenty years people could very well be saying, "Remember gasoline engines?"
tonto.eia.doe.gov/dnav...
If you compare 2006 to 2007 you will see the first 5 months of 2007 were all higher than the same month in 2006, but the last 5 months were all lower. Also note that the first three months of 2008 are all down from the same month in 2007.
Very incisive view of our current situation- thank you.
The only reason domestic oil and gas exploration at these prices isn't setting records is the regulatory framework imposed on energy producers by the Congress. A dangerous gambit, if you will, to foresake proven production of known energy reserves in the name of yet to be developed eco-friendly technologies.
Will this spell the end of the internal combustion engine as we know it, and herald in an era of independence from foreign cartels, or are we at the onset of a self-imposed economic depression, due to the spiraling cost of all forms of energy? I'm afraid we're going to have to wait awhile longer to find out the answer to this question.
I agree with you 100% about the immediate, desperate need to exploit our proven traditional domestic energy reserves. However, the Greens now running the Congress aren't going to let that happen. Only their defeat at the ballot box will allow some economic sanity to prevail in Washington.
Simply put, short of a self-imposed economic depression or war, they are not going to compromise and do what's in our nation's best interests. So we're going to found out what they have in mind for us, like it or not. Like you, I'm not particularly optimistic about the outcome.
A Yankee with a little sense. Never thought I'd see such.
Rebeldog
I agree whole heartedly. The U.S. has about fifty years of proven reserves (not counting the East and West coast offshore areas off limits). Allowing domestic oil companies to do what they do best, explore and harvest the petroleum resources we have on our own continent. Along with a responsible, defined energy policy would lessen our dependence on fossil fuels over the next fifty years. Set benchmarks that are achievable, and monitor progress. perhaps every five years review the progress and make adjustments as necessary.
Politicians blame oil companies for some arbitrary conspiracy to keep prices high, when in truth, it is the Congress that has restricted the free flow of oil at market prices by enacting laws that have effectively restricted the upgrading of our domestic oil infrastructure. Drilling/exploration restrictions and the cumbersome environmental rules that prevent the building of new, more efficient refineries, has more than anything reduced our domestic supply.
I realize that asking Congress to do something with intelligence is asking the impossible, just thought I would put in my two cents worth.