Friday, April 29, 2005

Yada yada yada.

The story isn't going to change, so I'm going to start posting less of this stuff (since it's all slight variations of the same themes), but for today:

Global competition for future energy supplies heats up.

Is there fraud in the house of Saud?

From Russia, with love: $60 oil.

Exxon and Shell Profits Surge Even as Oil Production Declines. [WSJ - $]

Exxon oil and gas production down 4.7%, Shell petroleum production down 5%. Hard to tell what reality is though, they traded so much stuff around.

Oil in troubled waters.


Phil Verleger, an energy economist associated with the Institute for International Economics in Washington, DC, reckons that the cartel itself may be to blame for the speculation: by declaring its intention to prop up prices, first at $30 and now at $40, “OPEC has given Wall Street a free put option” (because investors believe the cartel will cut output to stop prices falling).

Supply constraints coincided with a huge boom in oil demand. Global oil consumption last year increased by 3.4% instead of the usual 1-2%. Nearly a third of that growth came from China, where oil consumption rocketed by perhaps 16%. One senior European oil executive claims that, in contrast with the embargoes and supply-driven price rises of the past, “This is the first demand-led oil shock.”

And it was not just China that used a lot more oil. India's oil consumption too leapt last year, and America's was quite robust. In fact, despite $50 oil, global oil demand in 2004 grew at the fastest rate in over 25 years.

“The illusion that oil is in perennial oversupply has led to two decades of underinvestment in the oil industry. The world has been living off the legacy spare capacity built up many years ago.”

Given today's high prices, surely the market will soon enough provide the necessary new infrastructure? Probably not, for two reasons. The first is that the world seems to be coping rather well with today's shockingly high prices, so perhaps they have to persist for longer or rise higher still before investors are stirred into action. The second reason is the bitter memory of oil at $10 a barrel.

OPEC countries are unlikely to rush to build lots of spare capacity because they are worried that another price collapse may follow. PFC Energy observes that when the oil price hit $55 late last year, spare capacity was less than 15% of the 8.7m bpd peak reached in 1985, and notes: “OPEC national interests do not lie in creating large capacity surpluses that have existed for most of the history of oil.”

The western oil majors are even more terrified of another price collapse, and are keeping a tight rein on their capital expenditure. Projects are typically “stress-tested” for profitability at $20 a barrel or below. Some argue that Big Oil is being too cautious. But nobody thinks that spare capacity will ever return to the gold-plated levels of the mid-1980s.