RK ARCHIVE - Crude Oil Approaching $90 per Barrel

Supply and demand, in other words, is pushing oil prices inexorably higher. According to the U.S. Energy Information Administration's latest short-term outlook, despite high oil prices, "World oil consumption in the fourth quarter of 2007 is projected to be 1.8 million barrels per day (bbl/d) above fourth-quarter 2006 levels." At the same time, OPEC production capacity remains constrained, with no relief in sight. Since 2004, OPEC crude oil production capacity is up 1.34 million barrels per day, while world oil demand is up 3.45 million barrels per day. That's a gap of 2.11 million barrels per day, which is a major problem given that non-OPEC production is barely increasing, with some areas -- the North Sea, for instance -- actually decreasing.

How much of the oil price surge since 2004 is due to Iraq? At around 2 million barrels per day, Iraqi output is about the same as it was in 2004. Even compared to pre-war crude oil output levels of 2.8 million barrels per day, current Iraqi production is down just 800,000 barrels per day -- less than 1% of world oil demand (85.8 million barrels per day). In other words, Iraq has almost nothing to do with the increase in crude oil prices from $40 or so in 2004 to nearly $90 per barrel now. Instead, what's causing it is continued increases in world oil demand, constrained OPEC production capacity, flat non-OPEC oil output, and other factors like a weak dollar and investment flows.

What's going to happen next? Barring an oil supply disruption, most likely prices will hover in the $80-$90 per barrel range. But the bottom line is that until we start breaking our oil addiction, we are going to remain at the mercy of our buddies in Saudi Arabia, Iran, Venezuela, etc. And oil prices will remain high.

P.S. The impact of a Turkish-Kurd clash in northern Iraq should not affect oil market fundamentals at all, given that NO OIL has been exported from Iraq through Turkey since the war (the Kirkuk-Ceyhan line has been down almost constantly). So that's just silliness ("truthiness?") right there.

Comments

friends to the north (JScott - 10/16/2007 10:52:33 AM)

Whenever oil comes up we always seem to think of the Middle East largely due to their oil reserves but laso largely due to the focus of the media on this particular area which tends to make people think that the US gets most of its oil from there which is not the case. Our largest oil imports, whether crude or otherwise come from our friends to the north in Canada, about 1.7 million barrels at day in crude oil. Saudi Arabia is the only ME exporter in the top 5 countries we import oil from and we import more from Mexico than than the Saudis. The other nations in the top five are Venezuela and Nigeria.
The thing about oil that no one is talking about is the fact that the two biggest areas of future production capacity are South Africa and North/South America. By 2010 your talking 700k barrels a day from Sudan alone as well as 1.1 million a day ( exactly what we purchased from Venezuela in July 2007)from countries like Chad, Ivory Coast and Guinea. Brazil will certainly be a real player with the capacity of 3.9 million barrels a day (about what we get from Canada and Mexico in any given month).
There are certainly some political descisions we can make to not just wean ourselves off of oil to be sure, but what I would like to see is an effort to wean us off of the oil from the ME in particular and build new allainces for the future. We seem to have to pick up the tab in the ME with Iraq when we get 1.5 million barrels a day from Saudi Arabia and much less from Kuwait and Iraq while China gets 50% of its imports from the ME. What about there share of stabilization?
Also China is the leading front in Sudans oil exploration and production capacity that by 2020 could only trail Nigeria and Algeria in capacity. The issue of Darfur, while not really engaged at all by the US other than the sanction route which do not seem to be working internationally prevent the US from tapping this potential market for oil. In 2007 we certainly may be at "the mercy" of the ME, but by 2020 to 2030 we will not potentially have to be and thats where we need to start moving.
No one is really talking about our own potential either in this market where we seem to have the desire to buy more from others than we do to seek out new fields in North America.
The only real reference in recent debates was about States determining whether we should allow exploration/production I think in the Republican debate. The reference to Lousiana was an interesting point. Why should they have the greeater burden while California with potential the greatest resource remains on the sidelines. Interesting question.

Oil is a fungible commodity (Lowell - 10/16/2007 11:07:48 AM)

and it's a world oil market. It doesn't really matter specifically where we get our oil from, the issue is that all the excess production capacity is in Saudi Arabia. Also, the Middle East and North Africa has about 60% of proven world oil reserves. Actually, it's much higher than that if you take out Canadian oil sands, whose inclusion in the Oil and Gas Journal's world oil reserve statistics has been controversial because oil sands are quite different than convention, liquid crude oil.