I have been cross linking relevant topic threads like this one to specifically related discussion groups elsewhere in the web. It is becoming quite a repository of important information though still not enough people are engaged in serious discussion on this topic even when it is at the heart of much of global politics at the moment and maybe for much of the next few decades. Nevertheless Good Job Marc! [thumb]
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Tight Oil Supply Won't Ease SoonBy NEELA BANERJEE
Published: May 16, 2004Two dollars for a gallon of gas? Get used to it. High fuel prices are here to stay, at least for the near future, because no relief is in sight for tight oil supplies.
Most oil-producing countries and the major oil companies already produce all they can. Smaller companies and wildcatters are reopening some mothballed wells, but their combined output is not nearly enough to affect the global supply. What little spare capacity there is is almost entirely in Saudi Arabia, which is willing to pump more — but the extra oil it could produce quickly is too heavy in sulfur for the main consuming nations.
The world economy has learned to roll with oil price spikes, so long as they are short-lived. But sustained high fuel costs will strain its ability to cope, experts say, and the current run-up is already starting to bite.
Wal-Mart Stores, for example, said last week that higher gasoline prices in the United States had taken an average of $7 a week out of the pockets of its customers, leaving them less to spend on other goods. Sales of some of the largest and most gas-hungry sport utility vehicles were down last month, compared with a year earlier. The nation's trade deficit widened to $46 billion in March, largely because of oil imports. And in Britain, the government is making contingency plans in case of mass protests against high fuel prices, the trade journal Platts Oilgram News reported Friday.
The oil industry is constantly looking for new supplies, and with crude oil closing at a record high of $41.38 a barrel in New York on Friday, producers have plenty of economic incentive to step up output. But developing a new oil field takes time, and energy companies can do little to rush projects, industry experts said.Marathon Oil, a large independent company based in Houston, is pumping its fields flat out — the equivalent of 365,000 barrels a day, counting crude oil and natural gas. That includes new fields in Russia that produce 15,000 barrels a day. Those fields have the potential to yield an additional 45,000 barrels, but only after five more years of investment and work, said Paul Weeditz, a company spokesman. Marathon's new projects in West Africa will take even longer.
"Companies are always under pressure to grow production, so they are always trying to bring new wells on," Mr Weeditz said. "Many people may think it's a matter of turning the tap on and off, and that there's excess capacity, but that's just not the case."
Major oil producing areas like the North Sea and Nigeria, which produce the most desirable type of oil, known as light sweet crude for its low sulfur content, are operating at capacity. So are many of the refineries that turn the oil into usable fuels.
United States refineries were running at 96 percent of maximum output in April, the Energy Department said. As a result, wholesale gasprices reached record highs last week, and those prices are quickly passed along to consumers at the pump.
"The worrying part is that no end is in sight for the oil price rally," said Jan Stuart, director of energy research at Fimat USA, the brokerage unit of Société Générale. "Whatever is driving this upward, those factors are not changing: high demand, lower inventories, supply that is constrained, and only in part by OPEC decisions, and turmoil in the Middle East."Those price records are not adjusted for inflation. Several times in the 1970's and 1980's, prices hit what would be higher levels if converted into today's money. But those spikes occurred when supplies were disrupted by the Arab oil embargo and the Iran-Iraq war. With world demand so strong today and spare capacity so slim, the oil market is highly vulnerable to any new supply disruptions.
Many oil traders worry that terrorists may sabotage oil facilities, sending prices to new highs that could throttle the economic recovery. Since the situation in Iraq flared up last month, oil has become a prime target there. Suicide bombers tried to attack an offshore Iraqi oil terminal in late April, then blew up a major pipeline near Basra last week. Even more troubling, industry experts say, was the killing of foreign and Saudi oil workers at the Yanbu oil hub in Saudi Arabia."This is the only spare capacity you have in the world," said Fareed Mohamedi, chief economist for PFC Energy, a Washington consulting firm, referring to the Saudi oil industry. "So you're going to be nervous if there is any hint of disruption."
Oil traders estimate that unrest in the Middle East has added a "risk premium" to the price of oil of $4 to $8 a barrel. Yet even without that turbulence, the price of oil would probably still be higher now than it has been in years, given global demand, industry experts said.
The unexpectedly sharp rise, to more than $40 a barrel today from less than $30 a barrel just 18 months ago, has not noticeably slowed the economic recovery in the developed world. Most industries over the last two decades have found ways to improve efficiency, producing far more goods with the same amount of energy, and the United States has had a major shift from energy-intensive industries toward the service sector.
Even so, the world's appetite for oil is growing at its fastest rate in 16 years, according to the International Energy Agency, which tracks oil markets and stockpiles for industrialized countries. It forecast that the world would consume two million more barrels a day this year than in 2003, or 80.6 million barrels a day in all. China's great economic growth is behind much of that increase, and few analysts foresaw that either China's boom or America's recovery would be quite so robust, said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation in New York.
That roaring demand has eaten deeply into oil supplies. Despite lower official quotas, nearly all the members of the Organization of the Petroleum Exporting Countries are producing as much oil as possible to cash in on the high prices, and most major non-OPEC producers are doing the same. Russia, which is not an OPEC member, is something of an exception, but it is constrained by how much oil it can export through its pipelines and railways, all of them running at or near their limits. Venezuela, an OPEC member, is theoretically able to produce more oil, but its state oil company was crippled last year by a strike and an unsuccessful attempt to oust the country's president, and it has not recovered fully.
Analysts say that at most 2 million to 2.5 million barrels a day of spare capacity could sustain production for any length of time. Nearly all of it is in Saudi Arabia; the rest is mainly in Kuwait and the United Arab Emirates.For years, whatever the markets needed to stay on an even keel, the Kingdom of Saud provided. But since the late 1990's, the country has started to pursue a more independent oil policy. To increase its oil revenue and support a growing population and a generous welfare state, Saudi Arabia has chosen to hold back some production and let the price of oil rise, said Leonidas F. Drollas, chief economist with the Center for Global Energy Studies, a London consulting business. OPEC as a whole, led by Saudi Arabia, tried to cut output and make it hard for refineries to build oil stocks, driving prices higher.
But with the price of oil at $40 a barrel and more, the Saudis are clearly unnerved. Mr. Goldstein said they are trying to sell more oil now, but have found few takers, because of the high sulfur content of their crude. Instead, refineries in China and the United States are competing for the more limited pool of low-sulfur oil. "There is no sweet crude spare capacity anywhere in the world," Mr. Goldstein said. "There is no cushion for the next surprise."
Major oil companies are not bringing on new wells now to take advantage of high prices, said Ann-Louise Hittle, head of macro oils at Wood Mackenzie, a consulting firm in Edinburgh. Burned in the past by price spikes that proved ephemeral, the oil industry has become extremely reluctant to invest in wells that would be unprofitable at low prices, so it has none to reopen now.
Increasingly, the best prospects for new oil have proved to be in places that are off limits to major foreign oil companies, said Edward D. Porter, research manager for the American Petroleum Institute, a lobbying group in Washington.
While production is declining in areas like the North Sea and the lower 48 states, many of the most promising fields are in the Middle East. Oil companies have shelved hopes of even looking around Iraq soon because of the violence there and uncertainty about the future. Elsewhere in the region, most notably Saudi Arabia, domestic political infighting about foreign involvement in the national oil patrimony has kept out major Western companies.
The oil companies will keep hunting, but a significant easing of tight supplies may be several years away, industry experts say.
"You can't change this overnight," Mr. Goldstein said. "We need investment in sweet crude production or in refineries to process high sulfur crude, but there's a gestation period. Oil producers didn't think high prices were sustainable, but now they are coming to think they are."
LongeCity
