Below are a number of stories about oil from the last two days. We’ve all heard about Saudi Arabia’s “spare capacity”. The storyline is that Saudi Arabia can ramp up their production to make up for shortfalls from Libya and elsewhere. The other storyline is that Americans are cutting back on oil usage due to the high prices. This will lead to a collapse in prices.
Both storylines are complete and utter bullshit. The story about Chevron trying to figure out how to access the Saudi heavy oil should tell you everything you need to know about Saudi Arabia’s spare capacity. It is a fraud. They wouldn’t be working so hard at trying to access this heavy oil if their 50 year old wells still had plenty of capacity to grow. The Saudi wells are on the downward slope. There is plenty of oil in the earth, it will just cost gobs of money to access it and get it to market. Once the energy required to access a barrel of oil is more than a barrel of oil, it is game over.
The US demand is no longer the wildcard in world demand markets. Chinese, Indian and other developing country demand will be the driving force in oil prices.
Enjoy the temporary decline in gas prices because it ain’t going to last long.
China’s April oil demand up 8.3%: Platts
By Claudia Assis
By Paul Kedrosky · May 23, 2011
Useful WSJ piece tonight on the end of “easy oil”. Mind you, it does get lost in heavy oil hopes for a while, before circling back at the end to concede the following:
An even bigger challenge is getting the two crucial elements for generating steam: water and a source of energy to boil it. Most successful steam projects are in places with easy access to relatively pure water and a cheap fuel source, usually natural gas. Saudi Arabia and Kuwait have little of either.
With no fresh-water sources in the Arabian desert, Chevron has been forced to use salt water found in the same underground reservoirs as the oil. That water is full of contaminants that must be removed before it can be boiled and injected into the ground.
Finding the energy to boil the water will be even tougher. Chevron could use oil instead of natural gas—literally burning oil to produce oil—but that would burn profits, too. So the company likely will be forced to import natural gas from overseas, an expensive process that involves chilling it to turn it into a liquid, then shipping it thousands of miles.
Some experts are shaking their heads.
“They’re in trouble,” says Robert Toronyi, a retired Chevron engineer who now serves as chief operating officer for Quantum Reservoir Impact, a Houston-based consulting firm. He says the project is so challenging that it will be hard for Chevron to turn much of a profit.
The days of “Easy Oil” are over
Charlie Jane Anders —The major oil fields in the Gulf region have pumped more than half their oil, which is the point at which production usually begins to decline, one expert tells the Wall Street Journal.
“The easy oil is coming to an end,” says Alex Munton, a Middle East analyst for the Scottish energy consulting firm Wood Mackenzie. Meanwhile, global oil consumption jumped by 2.8 percent last year, thanks to fast-rising demand in China and India — the second biggest increase in the past 30 years. With oil production in the West barely rising, the world is increasingly dependent on the OPEC countries, especially Saudi Arabia.
So will this skyrocketing demand and dwindling supply lead to disaster? Not if the Saudis can tap their reserves of “heavy oil,” which is abundant but incredibly difficult to pump. The U.S. Geological Survey estimates there are three trillion barrels of heavy oil in the world, enough to last us another 100 years at current usage levels — but only if we can get at it. Chevron is spearheading a new project in Saudi Arabia to pump steam into the thicker oil in the Wafra oil field, thinning the oil and making it pumpable. If the risky procedure works, it could help provide access to a rich new source of oil.
The bad news, though, is that the Chevron project is so expensive, that it’ll be hard for the company to turn a profit even if it does work. So one way or another, look for oil to become much more expensive, and more of a precious resource, in the years to come.
Oil: Comfortable cushion disappears
By Gregory Meyer in New York
Published: May 23 2011 16:03 | Last updated: May 23 2011 16:03
Oil markets have shifted from flush to strained, with big implications for the global economy.
As recently as January, the world was sitting on what appeared to be a comfortable cushion of extra supply. Thanks to output cuts made in response to the recession, Opec, the producers’ cartel, maintained spare capacity of 5m barrels a day, or more than 5 per cent of global demand.
Then anti-government protests in Tunisia spread elsewhere in north Africa and the Middle East, first raising fears about oil shipments and then curbing output as they reached Libya, an Opec member now embroiled in civil war.
The International Energy Agency estimates Opec’s effective spare capacity has since fallen to 4m b/d – and benchmark Brent crude is well north of $100 a barrel.
The global economy, on the upswing from the financial crisis, has so far weathered the rise better than when crude first breached $100 three years ago. But analysts worry that sustained high prices or another surprise loss to output would sabotage the recovery.
Oil companies from ExxonMobil to Petrobras, the state-controlled Brazilian producer, have reported surging profits this year, owing to high prices. Cash has flowed into the coffers of oil exporting nations, enabling Saudi Arabia to boost social spending in the face of regional unrest.
The US Energy Information Administration forecasts crude will average $103 this year and $107 next, because of demand in emerging economies and slowing supply gains outside Opec.
Higher prices are putting pressure on consumers and have revived government inquiries into the cause. In the US, oil executives have been hauled before lawmakers to defend tax breaks, while government lawyers are scouring markets for evidence of manipulation. Rising oil costs are contributing to inflation, forcing central banks from China to India to raise interest rates.
Fast-moving prices have also prompted more companies to hedge risks – and encouraged hedge funds to wager on them. Trading volumes in crude oil futures have notched new records this year.
The uncertainty has also boosted the commodities desks at banks where the fee pool is expected to rise to between $9bn and $11bn this year, from $6bn to $7bn in 2010, according to Nomura Securities.
“Volatility has clearly almost doubled since the second half of 2010,” says Fasil Nasim, head of energy sales at BNP Paribas in London. “This has meant that clients are getting a lot more serious about managing risk. Also, from a general trading perspective, it’s definitely a lot more exciting than what we saw in 2010.”
New supplies are opening up in response to higher prices. Canada’s production, led by its western tar sands region, is expected to rise 18 per cent to 3.3m b/d by 2015, according to the Canadian Association of Petroleum Producers. Brazil’s offshore fields have turned it into a net crude exporter. US production is at the highest level since 2002.
Last year’s Macondo oil spill in the Gulf of Mexico highlights the costs and risks of bold drilling programmes, however. And some expected supplies are not appearing as quickly as hoped: Iraq, which hoped to quadruple production to 12m b/d by 2017, is unlikely to reach this target because of constraints in pipelines and export terminals, industry executives say.
The International Monetary Fund, in its latest economic outlook, says global oil markets have entered a period of increased scarcity. It also warns of a price spike similar to 2008, when crude surpassed $145 a barrel, if the tension between falling supply and rising demand intensifies.
The IEA projects oil consumption will grow to a record 89.2m b/d this year on the back of surging demand in Asia, the Middle East and Latin America. The agency recently shaved its demand forecast, saying $4-a-gallon petrol is chastening US drivers.
Countries such as Russia, Brazil and China have struggled to pass on the full force of price increases, bolstering demand, the IEA says.
Yet Amrita Sen, commodities analyst at Barclays Capital, notes that even when retail fuel prices have climbed, as in China and India, demand is stronger.
“Even with these kinds of price levels, the reason we’re not seeing any significant reaction is because these countries’ oil demand is rising from a very low base. They are nowhere near the US in terms of per capita oil consumption. For these countries, income effects dominate the price effect. When you earn more, you will spend it on luxury goods such as cars, irrespective of price,” Ms Sen says.