Oil Problems

Since there are occasional claims that current oil prices are not accurately reporting the market, and indeed it is possible that oil could experience another significant price drop short-term, the following information reminds us about long-term realities. And, yes, there would be more production if politics did not prevent modern technology from being applied to the oil industries in many nations, but those political issues are real and don’t show signs of going away.

In yesterday’s Week in Review section in the New York Times, the lead story, “Barreling Along: The Big Thirst,” included this:

Oil prices rose above $116 a barrel last week…“This is the market signaling there is a problem,” said Jan Stuart, global oil economist at UBS, “that there is a growing difficulty to meet demand with new supplies.” …At a recent energy conference, John Hess, the chief executive office of Hess Corporation, the international oil company, warned that an oil crisis was looming if the world didn’t deal with runaway demand and strained supplies…The number of [motor] vehicles in China rose sevenfold between 1990 and 2006, to 37 million…China…is set to overtake the U.S. by around 2015. China could have as many as 400 million vehicles by 2030…The United States is the only major industrialized nation to see its oil consumption surge since the oil shocks of the 1970s and 1980s…

Among several accompanying graphs, one showed these oil consumption changes since 1980: U.S. +21%; U.K. +2%; Japan +0.2%; France -14%; Germany -20%.

Last week, a Russian oil executive suggested he might not live to see the day when Russian oil production would exceed the 2007 level. A decline in production this year would be Russia’s first in ten years. Russia’s first quarter output this year was down 1% from a year ago. Russia is the world’s second largest oil exporter.

Financial Times today reports that Saudi Arabia’s “most powerful policymakers have said [the nation] has put on hold any plans to further increase long-term production capacity from its vast oil fields.” FT said these statements, including one by the king himself, “will harden the view of those skeptics who argue the kingdom is unable to boost production because of the high decline rates at its fields.”

Theories that Saudi oil production has peaked are not new. MSN Money in 2004 ran an article, “Is Saudi Arabia running out of oil?” There is a huge article, “The Breaking Point,” in the NYT Sunday magazine of August 21, 2005, by Peter Maas.

Near the end of his NYT article, Maas wrote:

The most worrisome part of the crisis ahead revolves around a set of statistics from the Energy Information Administration, which is part of the U.S. Department of Energy. The E.I.A. forecast in 2004 that by 2020 Saudi Arabia would produce 18.2 million barrels of oil a day, and that by 2025 it would produce 22.5 million barrels a day. Those estimates were unusual, though. They were not based on secret information about Saudi capacity, but on the projected needs of energy consumers… [Capon note: Today’s FT article quoted above has this from Saudi Arabia’s energy minister: “We are idling at around 9 million barrels per day and we will reach capacity of 12.5m by 2009…As far as I know, all the latest projections, at least up to 2020, do not require anything higher than that.” The article goes on to say that International Energy Agency forecasts “reach a different conclusion.”]

More from the end of Maas’s article:

It would be unfair to blame the Saudis alone for failing to warn of whatever shortages or catastrophes might lie ahead. In the political and corporate realms of the oil world, there are few incentives to be forthright. Executives of major oil companies have been reluctant to raise alarms; the mere mention of scarce supplies could alienate the governments that hand out lucrative exploration contracts and also send a message to investors that oil companies, though wildly profitable at the moment, have a Malthusian long-term future. Fortunately, that attitude seems to be beginning to change. Chevron’s ‘’easy oil is over” advertising campaign is an indication that even the boosters of an oil-drenched future are not as bullish as they once were.

—Ross Capon