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Gold/Mining/Energy : Oil & Gas Price Economics -- Ignore unavailable to you. Want to Upgrade?

To: kingfisher who wrote (214)	6/21/2000 9:11:00 AM
From: Cory	Read Replies (1) \| Respond to of 350

gold-eagle.com There is an impending energy crisis of enormous proportions that is heading towards us like an express train but no one seems to have noticed! The US government and DOE are very much behaving in a way that says "Crisis, what crisis?". The US government, including President Clinton, is obsessed with gasoline prices in the mid-west of over $2 per gallon. Did anyone notice that natural gas prices have risen to $4.50..ten cents short of an all time record? No! Instead everyone looks at the price of crude oil and blames OPEC. Richardson has been running around the world trying to convince OPEC to provide more oil. What seems to have escaped the notice of Mr Richardson, the DOE and many so called oil analysts is that OPEC has very little more spare production capacity. Comments are starting to appear in the press to this effect such as the following from a Dubai newspaper:- "Saudi Arabia could bring crude oil prices below the $30 per barrel mark, by deploying its spare capacity of some two million bpd. According to a senior Western oil executive, Saudi could easily bring additional barrels into the market, and Aramco may soon be called upon to act. Analysts have predicted that OPEC will announce an increase output next week, by at least 500,000 bpd. While in theory this increase is proportional, it is believed that Saudi will provide the majority of the oil. Saudi is one of the few OPEC members that have not already reached capacity. Such comments do not appear to create much concern because most people know that OPEC has 90% of the world's oil reserves so they must be able to "open up the taps" and fix the problem, right? Wrong! There is a big difference between reserves and production capacity. To increase production capacity you have to invest a lot of money and drill a lot of wells, but such activity was drastically reduced when oil dropped to $10/bbl in 1998. The impending energy crisis has been brewing for 14 years, it will not be solved by a diplomatic world tour by Bill Richardson, nor by draining the puny 570 million barrel Strategic Petroleum Reserve (SPR). I take you back to the oil shock of the 1970's. This experience led to a determination of western countries to develop non-OPEC oil production to reduce OPEC dominance. A drilling boom of incredible proportions ensued, the rig count in the US reached 4500 rigs compared with 880 today. This boom resulted in the world production capacity being 34% higher than demand! Saudi Arabia became the "swing producer" of OPEC reducing its output to maintain oil prices. They finally got tired of that dubious role in 1986 and decided to teach all the other producers a lesson and flooded the market crashing the oil price to $8 per barrel. Drilling activity declined dramatically and it took 10 years for the world demand to grow enough to catch up to world supply capacity. The decade of relatively cheap oil certainly did a lot to help fuel the current economic expansion in the US. The invasion of Kuwait by Iraq and the subsequent UN sanctions imposed upon Iraq helped to reduce world oil inventories and production supply. This decade of low oil prices caused a significant slow down in oil exploration and development in the US. The long term implications of this were of little interest to the government because the benefits of cheap foreign oil were a boon and OPEC seemed disorganized and unthreatening. By 1996 oil demand had grown to the point where it was getting close to world potential supply. Drilling activity increased through 1997 and early 1998. But then OPEC made a fatal mistake in November 1998... they agreed to increase production by 10% just as the Asian Financial crisis hit. What happened next is truly a mystery. World oil demand growth slowed, although actual demand never declined, the rate of increase reduced slightly. World supply exceeded demand by a mere 5%, yet the price cratered to $10/bbl. The press spoke of a "world glut". This was nothing compared to the 34% excess of 1986. The IEA was still predicting that by the year 2010 the world would need 113 Million BPD. The oil industry should have been worried like hell as to how they would be able to increase to 113 million BPD in 10 years instead of being in a tail-spin due to 5% oversupply...with a worldwide decline rate of around 6% this translates into adding the production of Saudi Arabia EVERY year for the next 10 years.Despite a mere 5% surplus the oil industry imploded and almost self-destructed...hundreds of thousands of experienced people were laid off doing irreparable damage to the industry. The majors took the opportunity to sneak some mega mergers past the FTC...the consolidations were quoted as being necessary to survive in a low oil price environment...that would have been believable if this had started with some small independent oil companies who only have upstream revenues..no, it started with the integrated majors Exxon and Mobil, BP and Amoco! (weren't Exxon and Mobil off-springs of Standard Oil companies that was broken up and was the start of what we know as anti-trust?). The US government should have been extremely concerned about such cheap oil and the damage to the oil industry. But instead they were so happy to have the boost to the US economy of cheap oil and the boost in Democratic support from motorist who were ecstatic about filling their tanks for 98 cents a gallon. OPEC is considered to be a bunch of bad guys, but the West can thank them for the quick and concerted effort to rescue oil prices. If this had not been done the pain and damage suffered by the world's oil industry would have put in jeopardy its very survival. OPEC is being blamed for this dramatic rescue of the industry from the jaws of disaster. The present level of oil price is not OPEC's fault. It is the fault of 14 years of mis-management of energy policy by the West and in particular by the world's biggest consumer, the US. The 1986 oil price crash ended the concern of western governments with the threat of OPEC. The lack of coherent long term energy policies, the lack of government tax incentives to develop non-OPEC fossil fuels, the lack of tax incentives to develop alternative energy sources have resulted in today's world oil shortage. Western governments have been happy to tax fossils fuels at very high levels which has kept down the basic price that is paid to oil producers and so has limited the re-investment in the industry. Today natural gas is almost at an all time high...natural gas production is not controlled or manipulated in anyway by the OPEC cartel so how come the price is so high? Mismanagement of long term energy policy. Conversion of oil burning power stations to natural gas has gone at a galloping rate but without anyone assuring the appropriate gas supply is forthcoming. Today in the US out of 880 active drilling rigs 680 are drilling for gas..only 200 are drilling for oil. So even at $32 per barrel the "black gold rush" has not yet started. This is mainly because the impending crisis has not been recognized and as mentioned earlier the salvation is foolishly expected to be provided by OPEC who, being almost at maximum production, will need nothing short of magic to provide significant extra supply. Fellow Cafe members, there is only one way out of this mess. It is not going to come from the puny SPR. (what happens in 6 months when it is empty?).It is going to come from a massive increase in drilling activity to permanently expand production capacity. If you want to profit from this situation the drilling companies are poised to benefit from a huge drilling boom and increase in drilling rig rates. Many of the drilling companies like R&B Falcon, Parker drilling and others are at 50% of their 1997 highs, despite having risen 50% in the last 6 months. In 1997 the oil price was only $22! This crisis has its roots in the 1980's. The solution is not a quick fix. The drilling industry is set for a multi-year expansion. Getting enough oil and gas for today is only part of the problem. Expanding capacity to 113 million BPD by 2010 is much more of a challenge. This is a comment from Bloomberg website on friday:- "Oil drillers' stocks rose, sending the Philadelphia Oil Service Sector Index up 4.4 percent, after Goldman, Sachs & Co. said rates being paid to drillers in the Gulf of Mexico and elsewhere are climbing faster than expected. Goldman raised its earnings estimates by 15 percent to 20 percent for the current year for companies such as Noble Drilling Corp., Global Marine Inc., Rowan Cos. and Ensco International Inc. The firm said share prices for these and other oil drillers could rise an average of 60 percent from current levels." This dissertation leads one to the conclusion that oil and natural gas prices are going to be high for a very long time. This poses a significant threat to the US economy because the practice of analyzing inflation indicators at their "core level" which "excludes volatile food and energy" is very dangerous accounting because energy price inflation is not going to go away...it will be part of the core inflation. In the longer term the US government needs to develop a robust energy policy. They need to develop closer ties with OPEC producers because they have most of the reserves. OPEC will need large investments to expand production. The Western governments could, for example, provide financing with re-payments and interest made in barrels of oil at a fixed price/barrel. There needs to be a high level of cooperation with OPEC and not confrontation. They are not the bad guys. The bad guys are the short sighted politicians who have been thrilled to enjoy a cheap holiday on energy prices for over a decade and they need someone to blame, other than themselves, for the impending crisis. 20 June 2000 *********************************** Editors Note: The above report was written by two oil industry experts with many years of experience between them. Their base of operations is Latin-America, one of the world's more prolific crude oil producing areas. This report was originally published at Bill Murphy's website, Le Metropole Cafe - lemetropolecafe.com