On New Energy Projects: Time to Get Real

Lately there has been a lot of “supply” side chatter about oil, as people tout various drilling projects as a solution to high gas prices, suggest that various nations increase production, propose investments/projects to help countries like Iraq increase production, etc, etc. The problem with nearly all of the chatter is that it doesn’t take into account the realities of present day oil production, and the ability of a particular project, production increase, etc, to even have an impact on energy prices.

In order to set the proper context around these discussions, let’s first take a look at some of the key data points around present day oil production. While most of these data points are from 2006, they’re still quite relevant when you consider that global oil production has either remained roughly constant or declined since that time. 

• U.S. Crude Oil Production: 5,102,000 barrels/day
• U.S. Net Petroleum Imports: 12,390,000 barrels/day
• U.S Petroleum Consumption: 20,687,000 barrels/day
• Total World Oil Production (2005): 82,532,000 barrels/day
• Total World Oil Consumption (2005): 83,607,000 barrels/day

The most recent news around oil production is the fact that at this Sunday’s oil Summit in Jeddah, the Saudis promised to increase oil production by roughly 200,000 barrels/day, or to increase the world’s total oil production by about 0.24%. At the same meeting, the Nigerians noted that attacks on oil production facilities have caused their output to drop by about 1 million barrels a day, an amount equal to about 1.21% of the world’s total production. While every increase in supply helps, it doesn’t take a PhD in economics from Cambridge to see that the Saudi’s increase won’t have much of an impact, and that the Nigerians regaining their full production capacity would have a rather minimal impact as well.

It’s a telling sign of how tight global oil supplies are when changes in global oil production of less than 2% are major news, especially when the wires have been abuzz with the prospect of Saudi Arabia possibly increasing global oil production by 0.24% for several days now.

The world’s energy needs are so great that it’s going to take an immediate production increase roughly equal to the output of Saudi Arabia, for there to be significant supply side downward pressure on oil prices. When thinking about U.S. based energy projects, the question offered is: “on aggregate are these projects capable of rivaling the present day output of the Saudis?” If the answer is no then we have to question those who claim that a particular energy project is going to make gas/oil cheaper. It’s probably better to view the projects as a possible way to reduce some of our energy dependence, as opposed to being a solution to the larger energy problem.   

The other thing to consider when considering the potential impact of a particular project on energy prices is the timeline required to get the project up and running, because not only may the project not provide short to medium term relief it may also just offset future demand for oil. Remember there are estimates that the current planned oil production projects will fall short of providing for future energy needs by 50%, so it’s unlikely that new previously unplanned projects will have be able to cause a significant decline in energy prices.

In other words: any energy project (foreign or domestic) has to viewed in terms of its % of world energy production, in addition to the length of time required for the project to become viable vs. demand increasing over time. Chances are these projects won’t be able to place downwards pressure on prices, and will turn out to be things that stabilize energy prices more than anything else. While many of the energy production projects that are either being kicked off or proposed by politicians will do “something” to help the problem, the economics just aren’t there for the projects to provide significant relief from high energy prices.

This is not to say that the projects are good ideas or bad ideas, but to stress the importance of putting them into their proper context. Don’t get caught up in placebo solutions that aren’t addressing the core issue of a need to move away from fossil fuels towards renewable and/or alternative energy sources.

Final note: perhaps the most striking aspect of the data points above is the gap between oil production and oil consumption at a global and U.S. level. If this trend continues coupled with the fact that oil production is stagnant (if not declining) at best, how can any new oil project do anything but to help stabilize prices if they’re just making up for production declines elsewhere?

Something else to think about is the fact that China has been dealing with a fuel shortage since 2007, yes you read that correct: the country that has been driving oil demand like no other hasn’t been able to import enough oil/produce enough fuel to meet all of their needs.

I.e. all of the energy demand from China isn’t even being met right now, and future production increases are likely to just help China cover its shortfalls.  

You can read more of the EIA’s energy statistics here.

You can read more about the Saudi’s production increase, Nigeria’s production declines and the energy summit in Jeddah here.

Sources:

The Energy Information Administration: “Petroleum Basic Statistics”

The Financial Times: “Saudi Oil boost fails to alleviate concerns” – Andrew England, Carlos Hoyos -- June 22, 2008.