Thursday, May 22, 2008

In A Twin Killing Of An Eye

Overnight, oil prices jumped more than $5 a barrel.

They had been heading upwards, inexorably, all year, with one or two hitches in the road. This past week, however, has seen it rapidly soar past $130 a barrel.

Conventional wisdom on Monday pointed to such obvious things as the heated rhetoric in the American political campaign, the situation in Africa, a jump in demand from Asia, the summer driving season, all of which together could explain a spike like that. some of us guessed, there was a bigger story in play:
Oil prices leaped above $135 in overnight trading on Thursday, a new record that underscored the growing pressures that runaway energy prices are placing on some of the biggest names in global industry.

By midday Thursday, oil had fallen back and was trading at $131.95, down $1.22 from Wednesday’s close. But in a week that has seen the oil price rise by $4, the economic consequences of high fuel costs continued to mount.

[...]Thursday’s gains came after a series of unsettling reports that suggested world oil supplies may not be able to keep up with future demand, a situation that could potentially lead to even higher prices.

On Wednesday, weaker-than-expected weekly inventory data in the United States stoked fresh worries over oil supplies in the world’s biggest economy ahead of the busy summer driving season, sending oil prices up $4.19 a barrel on the day.

Some investors reacted to a report on Thursday in The Wall Street Journal that the International Energy Agency, an Paris-based policy advisory group for industrialized countries, was concerned about a reduction in the long-term world supply of crude oil.
The IEA has usually used the reports of the individual nations of OPEC and other oil producers to estimate world oil supplies.

Needless to say, nearly every nation inflates their reserves. The report, therefore, is clearly unreliable.

Indeed, in this month's National Geographic Magazine comes a report about a renegade industry analyst in Saudi Arabia who's estimates indicate that, not only has Saudi Arabia passed peak oil, but that its reserves are draining faster than anticipated.

Many skeptics point to several reserves of oil that are a litle harder to get to, but now that oil prices have climbed, are cost-effective.

However, when we've seen oil prices spike in the past, they have been accompanied by fervent & frenzied attempts to find more oil, discoveries of which have provided smaller and smaller finds. Indeed, the price drop of the 80s and 90s in crude prices was due in large part to the discovery of oil to tap into.

In this current spike, there has been zero, nada, nil, increased effort to find new oil sources. For example, Exxon Mobil, while increasing the exploration budget over 20% this year, still spends more on maintaining existing oil wells than it does on exploration, and their goal is to increase oil production by 2010 by a measly 725,000 barrels a year, and that 20% increase barely makes up for the past eight years of sitting on a budget line item like they were drowning it in the bathtub, as prices steadily inched, then rocketed, upwards.

I predicted earlier this year that once oil hit $130 a barrel, we could expect to see $5 a gallon gasoline.

I was wrong, but I had not anticipated that it would take weeks rather than months to reach that level, and expected that interim oil prices would be absorbed into the price structure. However, I can report that here in NYC, premium gas is bumping andexceeding $4.50 a gallon already.

OK, so that's the good news.

Here's the scary part:
[In 2005, the IEA] said that if investments didn’t keep pace with the growth in consumption, the world might face a shortfall of as much as 15 million barrels a day by 2030. Instead of growing to reach 116 million barrels a day, global supplies would struggle to increase to 100 million barrels a day by then, up from today’s average of 86 million barrels day.

Contrast that with this (from NatGeo):
Last fall, after the International Energy Agency released a forecast showing global oil demand rising more than a third by 2030, to 116 million barrels a day, several oil-company executives voiced doubts that production could ever keep pace. Speaking to an industry conference in London, Christophe de Margerie, head of the French oil giant Total, flatly declared that the "optimistic case" for maximum daily output was 100 million barrels—meaning global demand could outstrip supply before 2020. And in January, Royal Dutch Shell's CEO, Jeroen van der Veer, estimated that "after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand."
That is, within the next ten years, we will literally and effectively be running out of oil.

Get used to it, folks. This is going to hurt. A lot. And in ways you can't even begin to expect.