Wednesday, April 30, 2008

Behind record oil prices, troubling signs in production

"james bond" mainstream007@grouply.com

International Herald Tribune
Behind record oil prices, troubling signs in production
Monday, April 28, 2008
NEW YORK: As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supply would rise as producers opened the taps to pump more.
But as prices flirt with $120 a barrel, many energy specialists are becoming worried that neither seems to be happening. Higher prices have done little to attract new production or to suppress global demand, and the resulting mismatch has sent oil prices spiraling upward.

A central reason supply is not rising to meet demand is that producers outside of the OPEC cartel - countries like Russia, Mexico and Norway - have been showing troubling signs of sluggishness. Unlike the Organization of Petroleum Exporting Countries, whose explicit goal is to regulate supply to keep prices up, the other countries are the free traders of the international market, with every incentive to produce flat-out at a time of high prices.

That they are not doing so is a troubling sign. Countries outside of OPEC have been the main source of production growth in the past three decades, as new fields were discovered in Alaska, the North Sea or West Africa. After the collapse of the Soviet Union, new opportunities emerged in Russia and the Caspian Sea.

But for a variety of reasons, including sharply higher drilling costs and nationalistic policies that restrict foreign investments, these countries are finding it difficult, if not impossible, to bolster output. They seem stuck at about 50 million barrels of oil a day, or 60 percent of the world's oil supplies, with few prospects for growth.

Analysts at Barclays Capital said last week that non-OPEC supplies were "seemingly dead in the water." Goldman Sachs raised similar concerns last month, saying that growth in non-OPEC supplies "can no longer be taken for granted."

At the same time, oil consumption keeps expanding at a faster clip than production. Demand is forecast to increase this year by 1.2 million barrels a day, to 87.2 million barrels a day.
Consumption has actually fallen a bit in the United States, the world's biggest consumer, as the country grapples with an economic slowdown.

But that drop is being offset by growth in other countries. World consumption is projected to rise 35 percent, to around 115 million barrels a day, in the next two decades. Most of the growth will come from China, India and oil-producing countries in the Middle East, where retail fuel prices are subsidized, encouraging wasteful consumption.

"What is disturbing here is that things seem to get worse, not better," an analyst at Goldman Sachs, David Greely, said. "These high prices are not attracting meaningful new supplies."
Oil for June delivery settled at $118.75 a barrel Monday on the New York Mercantile Exchange after earlier touching a record $119.93. Longer-term oil futures, dated for 2013, now trade at $108 a barrel, a strong indication that investors see little cause for prices to drop in the next five years - partly because of low expectations about production growth.

The outlook for oil supplies "signals a period of unprecedented scarcity," an analyst at CIBC World Markets, Jeff Rubin, said last week.

Oil prices might reach more than $200 by 2012, he said, a level that would probably mean $7 a gallon, or $1.85 a liter, gasoline in the United States.

Some regions are simply running out of reserves. Norway's production has slumped by 25 percent since its peak in 2001. In Britain, the fall has been a more drastic 43 percent drop in eight years. The North Sea is now considered a dying oil basin. The giant field at Prudhoe Bay in Alaska has undergone a similar decline.

In many other places, the problems are not located below ground, as energy executives like to put it, but above ground. Higher petroleum taxes and tougher contract rules, scarce manpower and swelling costs, as well as political wrangling and violence, are making it much harder to bolster production.

"It's a crunch," said J. Robinson West, chairman of PFC Energy, an energy consulting firm in Washington. "The world is not running out of oil, but rather it's running out of oil production capacity."

Recently, the case that has attracted the most attention is Mexico, a leading exporter to the United States, which seems increasingly helpless to stem the collapse of its largest oil field, Cantarell. Last week, the country's state-owned oil company, Pemex, said that production had fallen 300,000 barrels a day so far this year, a stunning drop. Mexico's output has dropped 9 percent in two years, and analysts say they expect further declines this year.

A combination of falling production and rising domestic consumption could wipe out Mexico's exports within five years, including the 1.5 million barrels it sends to the United States each day.
Another country, Russia, is also troubling analysts' forecasts. The country is not exactly running out of places to look for oil - a huge part of Eastern Siberia remains unexplored - and Russia has been the biggest contributor to the growth in energy supplies in the last decade.

But this month, Russian energy officials warned that the days of stunning growth that followed the demise of the Soviet Union were over, as the country would focus on stabilizing its output. Russia today produces about 10 million barrels of oil a day, up from a low point of 6 million barrels in 1996.

About 75 percent of the world's oil reserves are in OPEC countries, where governments voluntarily restrict their output to push up prices. As countries like Russia slow output, analysts say OPEC will have to pick up the slack. The oil cartel currently accounts for 40 percent of the world's oil exports.

Further clouding the picture, Saudi Arabia, the world's top oil exporter, signaled last week that it might have trouble increasing its production.

Saudi Arabia, the de facto leader of OPEC, signaled it would freeze any further expansion after next year. That dims the long-range outlook for OPEC supplies, though in the near term, Saudi Arabia is expected to loom larger in the market as it completes a $50 billion plan to increase its capacity to 12.5 million barrels a day. Yet that leaves it well short of the 15 million barrels that most experts say they expected the kingdom to produce in the long run.

OPEC's 13 members say they plan to spend $150 billion to expand capacity by five million barrels a day by 2012, according to estimates by the cartel. But that also falls short of most projections that say OPEC will need to pump 60 million barrels a day by 2030, up from around 36 million barrels a day today, to meet the planned growth in demand.

Reaching that level is going to be impossible unless the violence and tensions in both Iran and Iraq are resolved, analysts said. Because of sanctions for the past 30 years, both countries have been producing much less than their huge oil reserves would permit.

Not everyone has a pessimistic outlook. The U.S. Energy Department forecasts sustained growth in non-OPEC supplies this year and next. A study by the National Petroleum Council, an industry group that provides advice to the secretary of energy, outlined a variety of possibilities for oil expansion, and concluded that the world still had plenty of petroleum resources that could be tapped.

In fact, high prices have sparked a global dash for oil. Companies are trawling deep oceans or seeking to drill in the Arctic Ocean. In some cases, the hunt has been successful. Brazil, for example, has struck large offshore discoveries that could turn the country into one of the world's top 10 producers in the coming decade. Yet it takes years to bring such remote fields into production, and the market needs oil now.

To make up the shortfall, the world is increasingly turning to fuels made from unconventional sources, like biofuels or heavy oil. Canadian tar sands, for example, have attracted large investments, and biofuels have accounted for much of the growth in fuel supplies in the last two years.

The International Energy Agency, an adviser to industrialized countries, estimates that current investments will be insufficient to replace declining oil production, let alone increase overall output. The energy agency said it would take $5.4 trillion by 2030 to bolster global output, a level of investment that is unlikely to be met. It said a crisis "involving an abrupt run-up in prices" could not be ruled out before 2015.

"According to normal economic theory, and the history of oil, rising prices have two major effects: they reduce demand and they induce oil supplies," said Fatih Birol, the chief economist at the energy agency. "Not this time."

Notes:


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Daripada Abu Umarah iaitu al-Bara' bin 'Azib radhiallahu anhuma, katanya: "Kita semua diperintah oleh Rasulullah s.a.w. untuk melakukan tujuh perkara, iaitu meninjau orang sakit, mengikuti janazah, menentasymitkan orang yang bersin, menolong orang yang lemah, membantu orang yang teraniaya, meratakan salam dan melaksanakan sumpah."

(Muttafaq 'alaih)

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