Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: hdrjr who wrote (59842)	2/5/2000 12:05:00 PM
From: Tomas	Read Replies (2) \| Respond to of 95453

The real story behind today's high oil prices is the lack of production from non-Opec producers The Globe & Mail, Saturday February 5 JEFFREY RUBIN Is the doubling in oil prices last year really as unsustainable as the market believes? While spot prices climb higher and higher as global inventories shrink to a 23-year low, oil company valuations predict that a tidal wave of cheap crude is just around the corner. Perhaps it's time to reassess conventional wisdom's assumption that the world is awash with cheap oil. Talk all you want about the Organization of Petroleum Exporting Countries' new-found discipline, the real story behind today's prices is the lack of a supply response from the other 60 per cent of global production. The rise in non-OPEC output over the past year is less than half the cutback in OPEC production. Why aren't non-OPEC fields breaching the three- to four-million barrel-a-day supply gap created by OPEC cuts? To date, despite a more than doubling in crude prices, there has been an extraordinarily sluggish response in non-OPEC supply. While the surge in oil prices has resuscitated exploration activity from its previously catatonic state, activity is still a shadow of what it's been in the aftermath of past OPEC price shocks. Even with a 60-per-cent rise in the U.S. rig count from April's 50-year low, the total number of active rigs is still only about a sixth of the historical high of 4,530 set in the aftermath of the second oil price shock of 1979. Perhaps the reason that non-OPEC supply has been so sluggish is that even at today's prices, the all-in economics of boosting production are marginal. That's not, of course, because there isn't any oil left in the mature oil basins outside of the Persian Gulf. There is, and the industry will ultimately tap it. But at what price point is the real question. Could it be that oil prices aren't high enough to support the scale of capital spending needed to bring those barrels out of non-OPEC ground? Outside of the Persian Gulf, most of the world's oil fields are in the declining stage of their production life cycles or what geologists refer to as the downward slope of the Hubbert Curve, which shows the rate of decline over time. The flow of oil from any given field starts to decline when about half the oil is depleted. As a result, operating costs rise exponentially over the lifespan of a field, as more expensive techniques for oil recovery become necessary to recover the remaining harder-to-extract oil still in place. Secondary recovery techniques such as steam and water injection, and the use of detergents and carbon dioxide, help to extend the productive life of mature deposits, but at increasing cost to producers. In a mature basin, rising depletion rates mean that it takes increasingly larger capital investment to maintain a current level of production over time. In effect, producers have to spend more and more to stand still. That's precisely where most non-OPEC supply now lies. The world oil supply outside of the Persian Gulf now faces the downside of the Hubbert Curve, denoting a new area of decreasing returns to scale in oil production. Yet, at the same time, non-OPEC producers must not only maintain production, but also ramp it up, if they are to breach the gap created by OPEC cuts. So while all eyes are on the impending March OPEC meeting, it's what is happening among non-OPEC producers that bears watching. What broke the back of past OPEC supply squeezes was a torrent of competing, and ultimately displacing, oil from the rest of the world. But where is tomorrow's North Sea? And where is the tremendous capital expenditure needed to find and develop another one? Don't expect the cartel's resolve to weaken until there is evidence that prices have risen high enough to attract the development of competing supplies. Until that point is reached, not only will spot crude prices not tumble, but they also may well have to go higher. Jeffrey Rubin is chief economist and managing director of CIBC World Markets.