hb:
Barron's Jan 19, 1998:Crude Awakening;An article whose time has come.
This article appeared,, prematurely? in Barron's
In Jan '98.
More true now?
TA
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interactive.wsj.com
Crude Awakening?
If you see a fellow with smoke coming out of his ears striding down the main drag in Houston, it's probably Matt Simmons. Matt's the top dog at Simmons & Co., an outfit that knows everything worth knowing about the oil-service business and then some. And what's got his dander up is the International Energy Agency, the ultimate source on global energy supply and demand.
More specifically, Matt, normally the soul of geniality, is steaming at the IEA because of its chronically bum estimates -- or "busted numbers," in Matt's parlance -- of how much oil and equivalents the world is producing and consuming. Those bad calls, he growls, somehow always exaggerate energy supply, while they just as invariably downplay actual demand. The result is the near-universal perception that this old planet is awash in oil and gas. What it's really awash in, largely thanks to the agency's errant data, is energy complacency. And that way, warns Matt, lies the world's "third and perhaps biggest oil shock."
How ironic, he observes, that the IEA, formed in response to the first oil shock in 1973 as a way to help avoid a repetition of that ugly surprise, should be witlessly setting us up for another, even uglier one.
That the margin of safety between energy supply and demand is uncomfortably slim is not a brand-new theme for Matt. He's sounded it eloquently -- and, for us, persuasively -- on more than one occasion in these columns. And the disturbing truth, he asserts with some fervor, is being continually obscured by the IEA's persistent miscalculations and tendency to bury the subsequent corrections in the mountain of statistics it issues every month.
The agency, Matt avers, in its monthly tabulations has consistently underestimated energy demand outside the old Soviet Union by anywhere from several hundred thousand to a million barrels a day; and the only way, he grouses, to discover the size of those mistakes is by digging out the old reports and comparing the original figures with the revised ones. By way of illustration, he cites the IEA's forecasts last May for the second and third quarters of 97. By December, the agency had quietly revised its estimates upward by 500,000 barrels a day for the second quarter and a cool 900,000 for the third.
Even more egregious, Matt laments, were last year's erring calculations of energy supply. In January, the agency reckoned worldwide first-quarter oil supply at 45.6 million barrels a day. By December, it had revised its estimate for first-quarter supply to 44.1 million barrels a day, what Matt dubs a "silent drop" of 1.5 million barrels. He points out that it took 11 months and six separate revisions for the chaps to get it straight. Ah, well, it isn't only in oil that the facts lag the forecasts.
Moreover, between May and December, the IEA's guess on fourth-quarter supply was scaled down 1.7 million barrels, and just last week it was shaved by another 300,000 barrels. In other words, the estimate was a tidy two million barrels a day too high, the result, in Matt's pungent phrase, of "the folly of over-optimism," which afflicts both the IEA and the oil companies that furnish it with the data.
If the world still had 15-20 million barrels per day of excess oil supply (or even the eight to nine million that existed when Iraq invaded Kuwait), Matt says, you could shrug off the mistakes as just "sloppy analysis." But with the cushion now so very thin, such persistently inaccurate numbers are downright dangerous, setting this old world up for a very nasty blindsiding.
The IEA, Matt contends, should own up to how badly it and the companies submitting petroleum data are off the mark. Otherwise, he prophesies, no one will appreciate how out of control "our oil system really is." He figures the world is now producing at 95% of capacity. One of these days, OPEC, already running pretty much flat out, won't be able to "simply turn on the taps." And then, he comments dryly, "we have a problem."
And while massive new reserves have been found in places like the Caspian Sea and elsewhere in Central Asia, deepwater West Africa, Brazil and the Gulf of Mexico, wells must be drilled and, in most cases, pipelines built. In other words, as practical energy sources, they're all many dollars and some years removed.
Matt allows that the collapse of Southeast Asia will slow energy demand, but he doesn't buy the notion that it'll wipe out growth completely. He sees consumption rising over the next five years a minimum of 1.8% a year, and it may easily range as high as 3% annually. That translates into an increase in demand of 10 to 17 million barrels of oil equivalents.
Meanwhile, depletion takes its unyielding toll. Depletion is not something analysts tend to fret about when they tot up supply and demand, but according to Matt, on a global basis, it eats up about 3% of supply -- or roughly three million barrels of oil equivalents every day, every year. And of course, since, as he sagely informs, you can only produce a barrel of oil once, the world has to replace that much just to stay even.
Add the most conservative estimate of demand growth to the 15 million barrels of oil equivalents that must be replaced over the next half-decade because of depletion, and this is what you get: The industry must bring to market 25 million barrels a day of new production. That's the equivalent, Matt reflects, of another OPEC. And OPECs, in case you've forgotten, don't grow on palm trees.
Coming up with that kind of elephantine addition to the world's reservoir of on-tap energy, he stresses, is not going to be easy.
The reserves, as intimated, are there; the deliverability, alas, isn't.
What makes it tougher and tougher to get more oil out of the ground is that the things you need to get it out of the ground -- rigs, equipment and, yes, people -- are in very short supply. And, Matt stresses, that can't be remedied overnight. It'll be quite a stretch before the oil-service folks, however willing, are able to bring additional capacity on stream.
Matt's views on energy are not widely shared in the oil patch nor, for sure, in Wall Street. Which doesn't bother him a whit and makes them all the more compelling to us. The prospect of the troubles in Asia dampening the growth in demand has kicked crude down to $16 a barrel or so and inspired a big and confident short position in futures. But Matt sees it as a blessing in disguise. He's convinced the risk is quite high that we won't be able to satisfy the current rate of growth in demand and that, at some point, demand will surge past supply and prices will spike. Anything that lessens that possibility is obviously a plus.
But Matt speculates that the ultimate impact of the Asian mess could be considerably less than the one-million-barrel-a-day shrinkage in demand that he believes necessary to ease the looming squeeze. While he resolutely refuses to speculate on what prices will do (experience does make one shy in that respect), the clear inference we draw from all he says is that it wouldn't take much to send quotes scurrying back up.
Higher oil prices will take a nip out of the family finances. But, hey, look on the bright side: We'd finally be rid of all that incessant din about deflation.
None of the above, need we add, has been discounted by the financial markets.
It won't shock you to learn that Matt has been a raging bull on the oil-service group for the past few years, a disposition that has considerably increased the happiness and net worth (forgive us our redundancy) of his customers. Over this span, the drillers and their kin have appreciated madly, with occasional tumbles along the way. The last and most bruising of such spills started in the shank of last year and has continued more or less unabated in the opening weeks of this one.
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Message #54835 from heinz blasnik at Jun 21, 2000 1:32 PM ET
TA, neither 400K barrels nor 1 m. barrels are enough. as some observers have noticed by now, there's not much spare capacity - it's all in the hands of Saudi Arabia, which means every other OPEC member is set against a production increase.
the NAZ? yes, up with it...
regards,
hb
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