Hi. I'll just tick off a few facts that you can easily verify for yourself, using google. Seeing these may help you out.
1. Global production of conventional crude oil since June of 2005 is essentially flat. There has been growth in tar sands output, growth in biofuels, and tons of growth in NGL's--natural gas liquids. The latter does nothing to satisfy demand for liquid fuel. The former are expensive, and is barely keeping up with declining production of conventional crude.
2. The United States peaked in production of crude oil in 1971. The peak was predicted by Hubbert, using a model. Every field peaks eventually, and every region peaks eventually, and every country peaks eventually. Peak oil is not defined as "running out of oil."
3. The world is seeing a decline in exports of oil from nearly all the world's oil producers, who are consuming more of the oil at home. And, just as you would guess, at subsidized prices. Russia, Saudi, Iran, Venezuela and so on are all offering LESS oil for sale to the open world market, during the last few years. Demand destruction is not taking place in half the world. Meanwhile, in the OECD, demand has been flat for several years anyway.
4. The cost of the new, incremental barrel of oil has skyrocketed not only because of inflation. It has skyrocketed because most of the new oil is in harsh, difficult environments that are challenging from either a climatological standpoint, or geological. There is a convergence of analysis that suggests that the new incremental barrel now costs about 75.00-80.00 dollars to produce. Drop oil prices below 75.00 dollars for 6 months, and the world will see a TON of production go off line. Yes, you can find analysis that suggests the cost of the incremental unit is lower than 75.00. Some say 60.00. Others say it's even higher, closer to 90.00. Even if one uses the lower price of 60.00--again, this is an average of the new barrel--that level is hugely above the historic level of 25.00/bbl.
5. The aggregate, global decline rate of all existing fields is pegged at a conservative 4.00% per year. That means one needs to bring on the equivalent of a new Canada every year, just to keep up with the loss of supply. (And I'm being conservative). Yes, the world finds new oil every year. But it does not find cheap oil every year. It finds expensive oil, heavy oil, or hard to get oil. You should know that within the oil services industry, and among some analysts, the annual decline rate from existing fields is pegged at something much higher, closeer to 7.00%. Even Dan Yergin's CERA, who have been uber-skeptical about high oil prices now admit the global decline rate is at least at 4.00%.
6. The last decade has seen the disappearance of spare capacity. Days supply of global inventories have dropped in this decade, but more importantly, no major producer has an extra 1-2 million barrels of supply it can pour on the market right now. Spare capacity is defined as idle, ready capacity that can be producing in at least 90 days largely owing to a flip of the swtich. Not new production, or potential production. Spare capacity is from a developed field.
I hope this helps. While I may have amplified a touch the above 6 points with modest commentary, I stand by these 6 points as facts. You can easily check them out for yourself, as I said. They represent only a small portion of what a person needs to know, if they are going to be long Energy, and especially very long Energy, as I have been for the last 6 years. The reason the price of oil is at 140.00 is largely do to these 6 points. The most important of all, however, is the disappearance of spare capacity. If Russia, Saudi, UAE, VZ were to show they have a million in spare capacity, oil falls. Immediately. The market has sleuthed out, the spare capacity loss. And the market did not figure that out in 1 week. It's taken about 7 years, but the last 3 years in particular have been a time when the market has probed for spare capacity. It's just not there.
Best,
Gregor
PS: As I am confident that there will be no reversion to cheap oil, as in past cycles, the implications as I wrote in my first post are dire, for places like Southern California. SD, Orange, Riverside, San Bernadino, and LA counties were built out for 50 years based on the auto, and cheap gasoline. That is a gargantuan investment in an infrastructure that is already under severe pressure with gasoline at 4.00 dollars. |
