Tuesday, March 07, 2006

Summer Oil Prices; Upside Threats

Right now the corner gas stations are charging a "cheap" $2.27/gallon for the 87 octane, which is done a decent amount from around Christmas. However it is still substantially higher than gas prices were in January 2005. I am fairly pessimistic about gas prices getting back to $40 a barrel anytime soon, and I happen to think that unless we see a significant recession in the United States and/or China or peace breaking out, there is a lot of upside growth potential for what I am paying to fill the company minivan's tank this summer.

EconBrowser is looking through the recent CERA predictions on the increased global oil production projectins that they made. There is some good news here:



"For the others, however, CERA does not seem to be doing too badly at this
midterm review. Taken as a group, these countries were expected by CERA to
contribute 4.1 mbd of extra production by [Dec. 31] 2006, and so far they are providing 1.6, not too far from the halfway mark." [insertion mine]

However there is also some bad news:


"Two of these important countries (Iraq and Canada) actually experienced
production declines rather than increases, and Venezuela delivered essentially
no increase............when you look at the worldwide total, the discrepancies
are more significant. Worldwide, CERA said production capacity would increase by
5.5 mbd, whereas in the event, world oil production was only 1 mbd higher in
2005 compared with 2004. The latter statistic also confirms that although strong
demand was the principal factor that drove oil prices higher in 2004, supply
constraints were the big story in 2005."


The most interesting thing that I saw here was the following graph that James Hamilton put together by a careful eyeballing of the CERA predictions and EIA data. CERA predicted big production gains from 11 countries to make up for depletion elsewhere and add net new global production. Remember when you are looking at Dr. Hamilton's chart, that CERA was projecting from Jan 1 2004 to Dec. 31 2006, therefore if a country is roughly at 50% of the projected gain, the CERA prediction is reasonably accurate.



Just doing a quick eyeball of this chart, the big eleven had two declines [Canada and Iraq], one break even [Venezuala], five about on pace [Angola, Brazil, Algeria, Libya, Nigeria], one way ahead of pace [Saudi Arabia] and two countries adding capacity but significantly below pace [Russia and Iran].

Right now it looks like there are three drivers of lower production. The first is basic net depletion which anything that we do is fighting geology and physics. Canada is suffering this from the countries in the above graph. Great Britain's North Sea oil fields are facing the same problem.

The second driver against higher production is severe weather. We have seen Katrina, Rita and Wilma knock out a significant portion of US production. We have seen sandstorms shut down Iraqi oil exports, and we can expect to see relatively random weather related slowdowns throughout the year. However these problems could increase:

Dr Hamilton then notes the following about hurricane damage:

For the U.S., the biggest story is the hurricanes, which MMS reported had
resulted in a cumulative drop in production of 111.6 million barrels by January
5, 2006. If you put this on a per day basis for the entire year (111.6/365),
that would explain a drop of 0.3 mbd (compared with the actual observed U.S.
production decline of 0.4 mbd for 2005 as a whole).

AccuWeather is reporting that Atlantic surface water temperatures are high and similiar to last years' surface water temperatures which fueled the massive hurricane season. [thanks to Mike Shedlock, again] The warmer the surface waters in the tropical Atlantic, the easier it is for storms to form up and the more intense they become. There is significant risk of another really bad hurricane season in the Caribbean and Gulf of Mexico, which could increase the shut-in risks due to the fact that not all damage in the oil producing areas have been permanently fixed.

The final driver against increased oil production is geo-political instability which is a really polite term for people blowing each other up or at least credibly threatening to do that. The biggest difference between 2004 (when CERA first made its predictions) and today is the significant increase within oil producing countries of geo-political risk.

I think it is very unlikely for Iraq to not be a mess in a sufficiently short amount of time for them to add significant production AND export capacity by Dec. 31, 2006. Now the very interesting things here that I think CERA could not know about or at least placed a high discount on in 2004 was increased geo-political instability.

Nigeria was on pace to meet the CERA production projected increased, but right now that plan is going to the birds. However we know that the recent anti-oil guerilla offensive has knocked out 20% of that country's production [thus putting Nigeria into the net negative addition column with Iraq and Canada] but the threat of a sustained anti-oil campaign is increasing. Already, the guerillas have hit export platforms and pipelines. The most recent blast was against an already attacked subsystem, but as John Robb of Global Guerillas notes this is a bad thing: " Ongoing attacks on the recently abandoned facilities in the western delta will ensure that most of the production already lost will not resume. Our new epochal war's feedback loop is just starting to settle in... " The Nigerian MEND guerilla group is threatening attacks to take out another million barrels per day by the end of March. This threat is credible.

Iran has seen an increase in "geo-political" risk as the kabuki dance of the US threats, Iran pirouette, and sinking electoral chances of the GOP increases the odds that further actions, including military actions, are on the table. My colleague Cernig is ably tracking the drumbeat of propaganda that is bubbling out there to build a veneer of public threat and therefore support for strikes against Iran.

Venezuala has calmed down a bit as Chavez has consolidated power. The rhetoric coming out of D.C. is mainly for domestic consumption while the probability of a coup has decreased. But there is still a chance that Chavez could find it quite useful to threaten to play the oil weapon. Combine the current geo-strategic situation for Venezuala, and its historical role as an OPEC price hawk, there is upside price risk here.

Based on all of this, the US needs to thread an inside straight to maintain solid economic growth and oil prices under nominal record prices per barrel this summer. We need the Nigerian government and the international oil companies to successfully and completely co-opt the delta rebels, a de-escalation of tensions with Iran, and moving things to cluster fuck status from mega-gigantic cluster fuck status in the Iraqi oil production and export sectors, while also praying for great weather in the Gulf of Mexico.

Labels: ,

Links to this post:

Create a Link

<< Home

This page is powered by Blogger. Isn't yours?

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 2.5 License.