Oil, Economy & Policy (3)
The International Energy Forum, a meeting between oil producers and oil consumers, began on Sunday. OPEC at this meeting blames everyone but itself for high oil prices. We will demonstrate that they are to share in the blame.
That dog won't hunt!
It's an old country expression heard from West Texas to the hills of Arkansas and occasionally in the woods of northern Wisconsin. It's is usually used to indicate that the statement you just made to convince someone of the veracity of your argument isn't believable.
Look at some of these statements while we look for that non-hunting dog or, if you prefer fish, the proverbial red herring.
"Today, there is no need to get worked up and say, 'We must put more oil on the market', because the demands of oil consumers are probably motivated by political reasons," said Saudi Oil Minister Ali-al Naimi.
"We have raised output over last year and the prices have continued to climb," he told the Petroleum Argus, an oil industry weekly. (AFP)
"Both Kuwait and Qatar's oil ministers underlined OPEC's common position that there are ample reserves of fuel available at the world's pumps. " (AFP)
"...the United States has led calls for more oil to calm markets, OPEC oil ministers have repeatedly said that would make no difference." (Reuters)
(1) OPEC has repeatedly said that oil supplies are sufficient and that there is no need for more oil on the market. (2) OPEC tells consumers that they would sell more oil but nobody wants it. (3) That is followed by the faulting the falling dollar and speculation in the futures market.
Each of those statements are true, but as dogs, they just don't hunt. The first two statements fail to address the critical variable necessary to make them true. Supplies are sufficient at $119 because nobody wants to purchase more than the minimal amount at that price.
Get up early in the morning and stand on a street corner offering to sell bananas for $50 each. What happens? You go home at the end of the day without selling any fruit. Following OPEC logic, you must come to the conclusion that nobody wants to purchase any bananas. Might it just be that nobody wants to pay $50 for bananas?
To discuss production and consumption in the absence of price is virtually meaningless. Would OPEC have us believe that if prices were $30 per barrel or $60 that no one would want more OPEC oil than is being consumed today? The idea is absurd on its face.
There is much truth in the third statement that high prices are due to the falling dollar and speculation. If we look at one of the least favorable comparisons, which is the dollar vs. the euro, we are still left with the problem of explaining why the price of oil measured by euro/barrel is up €20 in the last year and has tripled over the last 5 years. Does that mean the €20 gain is all speculation? Perhaps, but OPEC is still not blameless.
Most of readers seen the graph below. OPEC's spare production capacity fell from over 6 million barrels per day in 2002 to about a half million barrels in mid-2004. It was late in 2006 when it finally reached and surpassed 2 million barrels per day. From late 2007 until present spare capacity has ranged below 2 million barrels per day.
The lower spare capacity has clearly increased the price risk associated with a supply interruption. The increased risk has opened the petroleum market to more speculation. In the graph above it is interesting to note that when spare capacity is above 2 million barrels per day the seemingly relentless march of oil prices is reversed.
Between mid-2002 and mid-2003 there was sufficient spare capacity to weather the loss of Venezuelan crude in the PdVSA strike as well as the loss of much of Iraq's production and all of its spare capacity.
OPEC is not to blame for the loss of the spare production capacity in Iraq following the invasion of the U.S. led coalition. Recent production has not been far from the pre-invasion averages as Saddam Hussein often cut back production in protest over the UN oil for food program. However, internal conflict and the failure of the new Iraqi government and/or Coalition Forces to continue exploration and development has reduced spare capacity to zero.
The situation in Venezuela is not due to outside forces and the loss of a million barrels of capacity must be put at the feet of the current government. Chavez fired thousands of PdVSA employees who did not meet the new political correctness of the current government. He has systematically treated PdVSA as a cash cow. Venezuela has failed to allow PdVSA to reinvest sufficient capital to maintain let alone increase Venezuelan production.
The confiscation of international oil company assets, higher royalties and income taxes, plus the addition of a new "windfall profits tax" on oil has reduced incentives for companies to invest in or supply expertise to the Venezuelan government. The continual confiscation of assets oil, telecommunications and concrete companies has raise the country risk of doing business in Venezuela.
If OPEC production were at current level and Venezuela had its former level of capacity there would be another million barrels of spare capacity. That would be sufficient to drop oil prices to the $80-$90 range.
OPEC, with the major exception of Saudi Arabia, failed to invest in the maintenance of spare capacity. It is OPEC's business whether they invest in more capacity or not, but that spare capacity is one of the reasons that the world has tolerated what is little more than price fixing since the 1970s.
OPEC has in many ways acted as a cartel. At times it has been effective at increasing and alternately lowering prices. Without spare capacity it loses all control over soaring prices. That also means that it loses influence over long term demand. Sustained period of higher than "normal" prices leads to substitution in the form of efficiency and other fuels.
The 8 gallon solution
As we will see in later in this series the ability to substitute fuel or efficiency for oil has a long-term impact on demand. Gasoline, jet fuel, diesel and residual fuel oil have few substitutes as transportation fuel because energy in liquid form and easy to store in a vehicle.
OPEC needs to fear the 8 gallon (30 liter) solution. Envision a "tank" that size. If you can determine a way to store a million Btus (1048 Megajoules) in that space with a weight of 50-60 lbs., then OPEC must compete on a Btu basis with other fuels in the sector that has shown growth in spite of prices.
Whether the new "tank" is a battery to store electricity, a nanotube storage device for hydrogen or something else matters little. Once the technology for a portable energy storage device that can use non-petroleum sources for its primary fuel such as coal, nuclear, solar, or wind power.
It may be too late for OPEC to do anything and maybe it can't. The 5-year run in oil prices has spawned enough research that within a few years we may all be driving electric cars. The reason won't be because they are more environmentally friendly. Rather, we will drive them because that they will cost less to operate.
It may be too late for OPEC to avoid the damage but lower prices would certainly forestall the implementation of new technologies for several years.
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From WTRG. Every once in a while James Williams comes up with a truly classic writeup. The above is one of these IMO.
The bolded parts are a great retort to that all-to-familiar refrain we have been hearing from OPEC in recent years.
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