Why We Can’t Stop $100 Oil

I'm posting this article not because I necessarily agree with anything in it, in fact some of the numbers are clearly wrong or irrelevant - but I think it touches on a number of topics important to the study of supply and demand numbers and their relationship.

Why We Can’t Stop $100 Oil

It's becoming evident that the rising price of oil has little relationship to anything Americans do, or don't do.

By Daniel Gross
NEWSWEEK
Updated: 11:40 AM ET Jan 5, 2008

When the price of a barrel of oil briefly hit $100 in trading last Wednesday morning, it was basically a nonevent. After adjusting for inflation, $100 per barrel in 2008 still isn't a record. And really, what's the difference between $99 and $100? (If you answered $1, come to the front of the class.)

It functioned more as a Rorschach test. For presidential candidate John Edwards, it was "just another example of how corporate greed is squeezing the middle class." American Petroleum Institute spokesperson Karen Matusic noted that oil's hitting the century mark should spur efforts to "explore for more oil and natural gas. After all, 80 percent of our potential domestic resources are cut off from drilling." For Renewable Fuels Association president Bob Dinneen, the event highlighted (wait for it!) the importance of recently passed legislation that subsidizes ethanol production. And for Treasury Secretary Henry Paulson, it was an occasion to marvel at just how well the U.S. economy has held up in the face of such challenges. "When you look at the structural changes in our economy, we're using oil more efficiently and it has a smaller overall impact on our growth," he told NEWSWEEK.

A hundred factors—production disruptions in Nigeria, speculators in Singapore, the pathetic dollar—helped push the price of a barrel of oil to $100 (or roughly what lunch at McDonald's in London costs, thanks to said pathetic dollar). But it's safe to say that oil's breaching three figures last week was explicitly not due to the venality of ExxonMobil's bosses, or to our inexplicable hesitancy to drill for methane in the Grand Canyon, or to the lack of subsidies for schemes to process bacon fat into diesel. In fact, it's becoming evident that it's not about anything Americans do, or don't do.

As we are endlessly reminded, Americans, about 4.5 percent of humanity, account for about 25 percent of the world's oil consumption. Historically, the consumption habits of these power users have had a huge effect on the commodity's global price. But we matter less and less each year, macroeconomically speaking. Oil nicked $100 the same day the Institute for Supply Management reported that the manufacturing sector—you know, that energy-intensive sector that burns up lots of oil—contracted in December. In theory, it should be hard for the price of oil to rise at a time when the world's economic engine is idling and plotting a shift into reverse. But that's exactly what happened in 2007.

Prices in the market are determined by supply and demand. Even with demand in the United States stagnating, global demand for oil is booming. "A big part of the oil story has to do with demand globally," says Henry Paulson. "There is strong growth in many countries around the world." Indeed, according to the World Bank, 104 countries grew at more than 5 percent in 2006—a modern record—and most of them powered through 2007 at a similar pace. Americans may have reacted to higher oil prices by buying smaller cars, but businesses and consumers in Asia, South America and Africa haven't been deterred in gobbling up oil. In 2007, according to OPEC, world demand for crude oil rose by 1.4 percent, or 1.2 million barrels per day. But the United States and its fellow industrialized firms in Asia and Europe—the 30 nations that make up the Organization for Economic Cooperation and Development (OECD)—actually reduced consumption. According to OPEC, non-OECD countries accounted for all of 2007's oil-demand growth.

Obviously, China has a lot do with it. Its consumption of crude oil rose from 5.6 million barrels per day in 2003 to 7.6 million in 2007. Thanks in part to China's growth, Asia in 2004 surpassed the United States as the largest consumer of oil in the world, according to Daniel Yergin, chairman of energy analyst Cambridge Energy Research Associates.

But demand is booming elsewhere, especially in the Middle East. The nations that have grown rich on petrodollars aren't just spending money on champagne and lavish hotels on the French Riviera. They're plowing cash into diversifying economies, building things that use lots of energy—condominium towers in Dubai, an indoor ski resort in Bahrain and petrochemical plants in Kuwait and Saudi Arabia. In the past, OPEC could calm oil markets by increasing supply. But OPEC members are now eating a lot more of what they grow. Between 1997 and 2007, notes Yergin, six Mideast OPEC members—Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates—boosted production by 2.5 million barrels per day. But they increased consumption by 1.9 million barrels per day. In effect, three quarters of the production increase stayed in the region.

The trends that boosted demand in 2007 are still intact. OPEC projects that in 2008, world oil demand for crude will rise by 1.3 million barrels per day, but that non-OECD countries will account for 1.1 million barrels per day, or 80 percent of the total. China alone is expected to boost consumption by 400,000 barrels per day. Lehman Brothers analysts project that this year OPEC countries will increase their use of oil by 350,000 barrels per day, or 4 percent.

It's beyond our control. Using less gas, running factories at fewer shifts and redoubling efforts to conserve and find alternatives may save us some money. But it won't result in lower prices at the pump.

URL: http://www.newsweek.com/id/84530

What Am I Trying To Do Here? (Parts I and II)

Part I

Anonymous suggested that I superimpose a Top 20 Importers graph on the Exporters to show who were the losers in what is becoming a bidding war for exported oil. This is an approach I’m considering, but feel at this time that it is beyond the scope of what I’m trying to do here. I appreciate the feedback and will probably at some point post some stuff on imports.

What am I trying to do here?

Clearly there is something going on in the world of energy and oil. It’s hard to say when it began. 2003, maybe, when oil prices started their climb to what is now $100 – a one hundred year record (at least, I’ll have to look that up) both nominally and in inflation-adjusted real terms. Although at $100, oil in the United States is still well below it’s peak in the early 1980’s when measured as a percentage of GDP. It will probably take $150 to pass that mark.

When I first started tracking the numbers, the focus was strictly on supply and whether we had reached or were near a definitive peak in global production. Talk of demand has always been tempered by a fact that the vast majority of analysts and commentators seem to completely miss. This is that you can’t measure demand. At least not in any realistic, timely manner. Measuring production/supply on such a vast scale is hard enough.

Once oil is extracted from the ground (produced) it enters a global supply chain that moves it through pipelines, onto tankers, to refineries, through pipelines, maybe onto more tankers, then into tanker trucks for the final delivery as gasoline to the station. This entire process is interspersed with storage of various lengths of time at different point along the route.

The consumer doesn’t demand oil. The consumer demands gasoline, or jet fuel, or one of several other refined, finished products.

Part II

My personal belief is that we cannot consume more oil than we produce. Some might say this is rather obvious, however the ramifications of this problem aren’t entirely appreciated until you start trying to track the numbers and make sense of what is being said about rising demand and stagnant supply. Invariably those concerned with future oil supply will invoke the 200-year chart plotting supply and demand. The timeline usually starts around 1860 when oil was discovered in Pennsylvania, or maybe 1900, and goes out to 2050 or 2100. At first there is one line which plots yearly oil production (supply) until the present and which was also consequently the demand (also known as consumption or “amount supplied”). We cannot consume more oil than we produce.

There is usually a vertical line drawn at the present or at some year in the recent past when the chart was produced. Maybe the areas to the left and the right of this line are shaded differently to emphasize the point and there is a label saying that everything to the right of the line is “projected” or “forecast.” But then something happens that makes me cringe every time I see it and makes me call into question the sanity of whoever was responsible. The line tracking supply and demand splits. From about that point a line representing supply begins to curve downward in a smoothed mirror version of the jagged line to the left of the present and tapers off somewhere around 2100. This would complete what is usually Hubbert’s curve or some variation representing the dying days of a finite resource. Now, in addition, and always starting the day after the chart was drawn, there is a second line, usually fairly straight, which shoots up into the heavens at about the rate of 2 or 3 percent per year. This is forecast demand.


It's hard to see the split here, because they don't project a peak
until 2010 and the "actual"production line is smoothed. It looks
like this one was made in mid-2006.

I have never understood this line and the conclusions that some draw from it because I don’t see how it could possibly ever exist. If we were to take two versions of the chart I describe, one produced in 1997 and one in 2007, the upper “demand” line from the former would have magically disappeared in the latter. Why? Because the “projected demand” for those ten years would have turned out to be exactly the same as the amount actually produced and supplied, overlapping, and thus becoming the single line that always exists in the past.

There may be good reason to produce charts like this. The creator is usually trying to warn of stark realities in our energy future. But they are using a sleight of hand to do this and ultimately I don’t think that is a good tactic. Usually the area between the upper demand curve and the lower supply curve is highlighted the way one would an Economics 101 supply and demand chart to note a shortage or surplus. The further into the future we move the worse the discrepancy becomes. Of course, as I demonstrated above with the example of the two version’s of this chart, real life doesn’t work this way. Just as in an Economics 101 chart, supply and demand always meet at one point which represents a single amount corresponding to a price (which I will get to soon).

I don’t mean to suggest that shortages and surpluses don’t exist. They certainly do. Whether it was gas lines in the Seventies or stories presently about China:

A shortage of gasoline and diesel fuel has led to long queues and rationing in some Chinese cities, and even civil unrest, causing some service stations to request police protection. The shortages began in October, and now Premier Wen Jiabao has called for increased refinery production. In mid-November, Wen said that the country needs “comprehensive measures to increase crude oil production and refining, to realistically ensure supplies of refined oil products."

The shortage can be blamed on one thing: excessive government intervention in the market. By setting prices artificially low, the Chinese government prevented refiners from making a profit on much of their production. That led many independent refiners to reduce production or else shut down completely, rather than suffer ever-increasing losses on their output.

http://www.energytribune.com/articles.cfm?aid=739

Our thirst or demand for oil and petroleum products can certainly outstrip the supply. Some may want to believe that 10 years from now demand will be 10 or 20 million barrels more than supply. And in some theoretical way they may be right. My point is simply that nobody has figured out a way to measure this demand. It always ends up being what was supplied (unless you look at the official data, then you’ll be even more confused, but more on that next).

Next:

Demand always exists at a certain price. This is why we have the issue of price and demand destruction.

On BP’s numbers the Oil Drum story on consumption in response to anonymous
Demand Destruction: Myths and Reality
http://europe.theoildrum.com/node/3443


Monthly numbers

To be continued...

Net Oil Exports - December Update

Net Oil Exports - December Update. Top 16 Exporters (90% of total exports) in blue, Top 20 Exporters (93%) in Pink.

Click on following link to download updated Excel spreadsheet(430kb):

http://www.savefile.com/files/1264162

scroll down to bottom of linked page and hit orange button on right and

then hit second prompt if download doesn't start immediately

December Revisions

This is a graph of the current Top 16 Exporters versus the original data I came up with for each month. These are not revisions from last month - in other words, if I do this in December 2008 I will be measuring the difference between those figures and the first data presented for November 2007 (here).

New York Times article on exports

Oil-Rich Nations Use More Energy, Cutting Exports
By CLIFFORD KRAUSS
New York Times
December 9, 2007
http://www.nytimes.com/2007/12/09/business/worldbusiness/09oil.html?_r=1&hp&oref=slogin

The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.

Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.

Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world’s fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon, a practice that industry experts say fosters wasteful habits.

“It is a very serious threat that a lot of major exporters that we count on today for international oil supply are no longer going to be net exporters any more in 5 to 10 years,” said Amy Myers Jaffe, an oil analyst at Rice University.

Rising internal demand may offset 40 percent of the increase in Saudi oil production between now and 2010, while more than half the projected decline in Iranian exports will be caused by internal consumption, said a recent report by CIBC World Markets.

The report said “soaring internal rates of oil consumption” in Russia, in Mexico and in member states of the Organization of the Petroleum Exporting Countries would reduce crude exports as much as 2.5 million barrels a day by the end of the decade.

That is about 3 percent of global oil demand. It may not sound high, but experts say demand for oil is so inflexible, and the world has so little spare production capacity, that even small shortfalls can raise prices. In 2002, when a labor strike in Venezuela took 3 percent of global production off line, oil prices spiked 26 percent within weeks.

The trend, though increasingly important, does not necessarily mean there will be oil shortages. More likely, experts say, it will mean big market shifts, with the number of exporting countries shrinking and unconventional sources like Canadian tar sands becoming more important, especially for the United States. And there is likely to be more pressure to open areas now closed to oil production.

Greater political stability and increased drilling in some important oil states, notably Iraq, Iran and Venezuela, could help offset the rising demand from other oil exporters.

“Ten years from now, world capacity to produce oil could be 20 percent higher than today,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But a lot will depend on how the geopolitics work out.”

Growth in demand among oil exporters is one aspect of a larger issue, breakneck economic growth in parts of the developing world. China and India are expected to account for much of the increase in global oil demand in the next 20 years. But Fatih Birol, chief economist at the International Energy Agency in Paris, rated consumption growth among oil exporters as the second-biggest threat to meeting the world’s oil needs.

“It’s a big problem, and growing all the time,” Mr. Birol said.

Internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005, according to government data. Exports declined more than 3 percent. By contrast, oil demand is essentially flat in the United States.

CIBC’s demand projections suggest that for many oil countries, including Saudi Arabia, Kuwait and Libya, internal oil demand will double in a decade.

Factors contributing to the trend include increased industrialization, higher government spending and increasing personal consumption. According to a World Bank report, economic growth in the Middle East and North Africa has doubled since the 1990s, and Russia has done even better.

Oil money is giving many countries the means to invest in their own economic development, and robust global growth is creating markets for their goods — including plastics, chemicals and fuels refined from oil.

To be sure, many oil-exporting states have a long way to go before they achieve Western living standards. The global oil market is still dominated by traditional consumers, particularly the United States, which uses nearly a quarter of the world’s oil.

Perhaps surprisingly, though, some producing countries have surpassed the United States in oil consumption per person. They include Bahrain, Kuwait, Qatar and the United Arab Emirates.

Particularly in oil-producing countries with large populations, like Indonesia, Russia and Mexico, a rapid rise in car ownership is a big factor driving consumption increases. Russian farmers are replacing horses and carts with gas-guzzling four-wheel-drive vehicles, while urban consumers are snapping up BMWs even before they learn to drive.

“Most of the producing countries have young populations entering the driving age and can more readily afford to buy cars because the price of fuel is low,” said Charles McPherson, an oil expert at the International Monetary Fund. “It’s certainly pulling product off the international markets.”

Some oil-exporting countries use price controls and subsidies to ensure cheap fuel for their people. These programs are politically popular, even though experts say they contribute to wasteful energy use.

Kuwaitis, for instance, often leave their air conditioning — powered by electricity generated from natural gas or oil-derived fuels — running for weeks while on vacation, said an official at the World Bank. Sportsmen of the United Arab Emirates ski indoors on manufactured snow and play golf on lush courses that require desalinated water produced with fuels refined from oil.

Saudis, Iranians and Iraqis pay 30 to 50 cents a gallon for gasoline. Venezuelans pay 7 cents, and demand is projected to rise as much as 10 percent this year. Auto sales have tripled in four years. “Where cheap oil is viewed as a national human right, you’ve virtually got runaway demand,” said Chris B. Newton, an executive of the Indonesian Petroleum Association in Jakarta.

Indonesia flipped from exporting oil to importing it three years ago because of sagging production in depleted fields and rising demand. Iran, Algeria and Malaysia are vulnerable in the next decade. Most oil experts view Mexico as the next country likely to flip, in as little as five years.

Rapidly falling production in Mexico’s aging Cantarell oil field is part of the problem. Also significant, though, is the rising number of cars on Mexican roads. They have nearly doubled, to almost 16 million, in the last decade, and gasoline consumption is growing 5 percent a year.

In Mexico City the other day, a bricklayer named Jaime Guerrero arrived at a local Chevrolet dealership. His extended family cried “bravo!” as he signed the papers for his first car.

“To have a new car in my name is a dream transformed into reality,” said Mr. Guerrero, 26. He and his family piled in and weaved through the chaotic traffic of the capital, hunting for a priest to douse the car with holy water.

“I don’t worry about the climate or shortages of oil in the world,” Mr. Guerrero said. “I just worry if gasoline prices go up.”

Net Oil Exports and WTI / Nymex Price

Found it. I'll update it soon. $80 a barrel? Wow! Remember those days! Jesus. Oh wait... this is from last month.

Net Oil Exports and WTI / Nymex Price

Net Oil Exports - November Update

I have arbitrarily increased Venezuela's domestic consumption for 2007 from about 580,000 bpd to 650,000 bpd based on two articles I read recently.

Oil is now used to create electricity. Some of Venezuela’s electric plants used to burn natural gas, but gas production has dropped, creating shortages that oil is filling. Domestic consumption of oil has reached at least 650,000 barrels a day, according to Venezuelan economists. Venezuela is importing oil products and may soon have to import gasoline. There is also the problem of contraband: subsidized gasoline smuggled out and sold at world-market prices in Colombia and the Caribbean. Between its domestic consumption and its use of oil to make friends overseas, Venezuela gives away or subsidizes a third of its production. Most of the rest is sold in the United States.

The Perils of Petrocracy, NYT Magazine , Nov. 4th, 2007

The numbers for Norway's production for the last three months are a bit sketchy. I'm using the EIA's from their Short Term Energy Outlook(STEO, Nov. 6th) . These differ from the IEA's numbers in their direction and size the last couple of months. Hopefully these will iron themselves out in the next few months with revisions. I am not including NGPL's for Norway and I probably should be. I'll add these next month (about 300 kbpd).

In response to comments about the percentage of total exports that these 16 countries represent: about 90%. The Top 20 would be 93%, Top 24 - 96%. I have plans to add four more countries now that the EIA has begun publishing more up-to-date numbers for the countries in question (Ecuador, Oman, Equatorial Guinea, and Azerbaijan) and Ecuador has rejoined OPEC. Probably the beginning of next year.

Click on following link to download updated Excel spreadsheet(320kb):

http://www.savefile.com/files/1203700

chart, crude oil, crude oil exports, graph, net oil exports, net petroleum exports, oil, oil exports

Net Oil Exports - October Update

FSU Exports July (September IEA report)

Former Soviet Union (FSU)

Russia – July actual, August provisional: Russian projections are also held steady, with total oil production in 2007 of 9.92 mb/d and 10.10 mb/d in 2008 representing growth of 2.5% and 1.8% respectively. Growth this year has slowed from 1Q levels near 400 kb/d, although inflated early-2007 growth levels need to be seen in the context of weak 1Q06 production due to weather. That said, August growth stood at a more modest 125 kb/d year-on-year. Recent months have seen production drift lower from Lukoil, Gazpromneft (formerly Sibneft), TNK-BP and Gazprom, partly offset by Rosneft increases.

Yearly growth by Rosneft currently stands close to 600 kb/d, with total production of 2.2 mb/d representing a five-fold increase on 2004 levels. Some commentators have suggested that organic production growth has been sacrificed to a programme of acquisitions that has reportedly pushed Rosneft debt to around $30 billion. This is seen as potentially undermining Rosneft’s ability to finance future development at fields such as Vankor, Sakhalin and Verknechonskoye, which helped underpin MTOMR projections for Russian output reaching 10.6 mb/d by end-decade. A further twist in the tale emerged from press reports in August suggesting that the government is planning to establish a new state producer incorporating the oil assets of Rosneft, Gazprom and Surgutneftegaz. Surgutneftegaz’s inclusion may in part reflect its cash-rich status, which in turn might help alleviate Rosneft debts.




Azerbaijan – July actual: Azeri oil production remains on track for growth of around 200 kb/d both this year and next. Prevailing output of some 950 kb/d could dip to 650 kb/d in September owing to construction work on the Central Azeri platform, part of the 700 kb/d offshore ACG complex. Work should largely be completed by October however, based on higher expected shipments via the Baku- Tbilisi- Ceyhan (BTC) pipeline. Total Azerbaijan production attains 1.1 mb/d in the second half of 2008, with increased contributions from the Azeri field and from start-up at the deep Guneshli complex. Growth will be dependent however, on maintaining the integrity of the BTC pipeline, after a Kurdish rebel group said BTC would be attacked unless Turkey desists from attacks on Kurdish rebel forces.

According to preliminary data, FSU net oil exports totalled 8.89 mb/d in July, up 70 kb/d from June and 520 kb/d higher than July 2006. A 150 kb/d month-on-month increase in seaborne crude exports, including an extra 90 kb/d leaving Baltic ports, was tempered by another drop in Druzhba transits, this time by 50 kb/d (see Refining section, page 44). There are reports of Lukoil having curbed June-July deliveries to German refineries, in part due to pricing issues. However, latest information suggests reinstatedvolumes for September. Average monthly FSU product exports fell by 20 kb/d in July.




August loading schedules suggest that exports via Transneft may have been 100 kb/d below July volumes, coinciding with an increase in Russian export duties from 1 August. However, higher BTC flows may have restricted any drop in aggregate FSU supplies to around 50 kb/d. Further declines in FSU exports are anticipated later this year. The threat from late-August of a strike by Turkish ship pilots, if realised, may hinder traffic through the Turkish straits which could restrict trade flows from FSU ports in the Black Sea. Maintenance is due to reduce Caspian output by up to 300 kb/d in September, which should overshadow extra Russian barrels exported before the next rise in crude and product export duties, effective 1 October.


FSU Exports July (September IEA report)

Azerbaijan, crude oil, crude oil exports, FSU, Kazakhstan, net oil exports, net petroleum exports, oil, oil exports, Russia

Cantarell (in progress)

Cantarell Monthly Oil Production 2002-2007

Data from Pemex 2007 Statistical Yearbook covering through December 2006, page 18.
Monthly data from 2004-2007 derived from yearly data, monthly Pemex hydrocarbon spreadsheets, and periodic news reports.



[add yearly chart 1 - Cantarell]
[add yearly chart 2 - Mexico and Cantarell]
[add monthly chart with Mexico and Cantarell separated]
[add Pemex monthly with exports]
[add monthly exports vs. Cantarell]

[add table with yearly Cantarell and projected decline losses]

[discuss worst case scenario projections and production vs. reserve estimates]