Seriously Conflicting Ideas

Jim Brown
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The analyst community, global geologists and economists are producing some vastly differing opinions over the future of oil production and prices.

I never cease to be amazed by the difference in opinion reported in the news. Opinions are like noses, everybody has one but you would think we could at least agree on direction.

Making headlines today was the former president of Shell oil with his claim gasoline will cost $5 in the U.S. in 2012. Here is a man who was at the helm of one of the largest energy companies on the planet and has testified more than once to Congress about the coming energy problem. His comments today got him a headline or two but in the end he will be ignored.

He believes there is plenty of oil but political restrictions not just in the U.S. are preventing us from finding and producing it. He is especially frustrated with the current administrations towards offshore drilling and believes the U.S. production will decline from 7 million barrels per day in 2010 to 6 mbpd by 2012. The administration has postponed its next five-year plan on offshore lease sales until 2017. That will be at least three years after the onset of peak oil if nothing changes in the global economy by 2014.

The IEA continues to spin its tales of increasing production from the current 86 mbpd to 105 mbpd in order to keep up with demand growth. Unfortunately about 80% of the oil the IEA expects the world to consume by 2035 has not yet been discovered. About 70% of the oil we are currently using will be depleted long before then according to their estimates. That means the amount of new oil discoveries needs to increase dramatically but annual discoveries have been declining since 1970.

OPEC continues to claim demand growth will increase each year but they have enough spare capacity to keep up with growth until 2020. This is such total crap I should not even dignify it with a response here. In a nutshell, OPEC claims from 5.4 to 6.3 mbpd of spare capacity. They are producing about 2.0 mbpd more than their current quotas but they don't reduce that amount from the spare capacity. They "supposedly" cut production by 4.5 mbpd in 2008 with 2.5 mbpd in "reported" excess capacity at the time they made the cut. Compliance with the cut is reportedly 57% meaning 43% of the 4.5 mbpd cut (2 mbpd) is actually being produced.

In 2008 the market ran out of oil even with OPEC at full production. Actually they ran out of light sweet crude not oil in general. Demand is rapidly approaching the same levels we saw in early 2008 but oil prices are still in the $90 range. The situation is very similar to the same situation we had at the end of 2007. Demand was reaching levels where supplies were tightening and oil prices were starting to react to the shortages. At the current rate of demand growth we could be back at the 2008 consumption levels by the summer of 2011.

OPEC has added some production since 2008 but they have also lost a significant amount due to depletion. Since those numbers are not public we have to continue to rely on their excess capacity claims that never go down and their claims the market is well supplied. However, we all know if the market is well supplied why are prices over $90? Something does not compute.

This trend is even more disconcerting then analysts vary widely on estimates. There are still analysts who believe oil prices will remain in the mid $80s through 2012. What dope are they smoking? The IEA expects prices in the $70s and $80 through 2020. They are way beyond the dope stage. Others are expecting the $147 highs to be broken in 2010. They are also not taking into account the available facts like current inventory levels 9% over the five year average.

The oil production and demand issue is an emotional issue. Because the actual facts are not available from the various producers analysts are left with counting tankers passing various choke points on the globe and measuring how deeply they are setting in the water to produce a calculated guess on production. Unfortunately that does not account for increased production inside the producing countries.

Others without access to the tanker tracker statistics try to plot the production using arithmetic projections but those are highly inaccurate since the lack of a valid starting point makes any calculation worthless.

Still other analysts use the average of analysts method. If they can find a dozen analysts with estimates they average the estimates and use that number as their own projection. Obviously another failed attempt that further clutters the forecast landscape.

Hedge funds and energy investment companies produce their own estimates using their own bullish bias. They peddle these estimates to their clients and further cloud the true facts.

It would be so much easier if every producing company were forced to submit their actual capacity, actual production and actual exports at the end of every month. Matthew Simmons wanted to force compliance by having OECD nations refuse to buy oil from countries without audited numbers. Unfortunately that has little chance of happening because of the nature of the beast. OPEC cannot even trust its own members to report correctly to its own organization. They also have to rely on outside sources like tanker trackers to provide guesstimates.

Until such a system is enacted we will continue to be forced to accept the claims of OPEC as gospel until those claims fail. I expect that failure in 2012. People I respect believe OPEC currently has about 1.5 mbpd of excess capacity in usable oil plus another 2 mbpd in oil most refiners can't use and therefore not a factor.

Assuming the global economy continues improving in 2011 that usable excess capacity will disappear and global supplies will begin to shrink. That shrinkage will reach critical levels in mid 2012 and we will find out for sure if OPEC is telling the truth. If not the world is going to get a lot smaller very quickly as the price of transportation rockets higher.

At that time we should see most analysts begin reading off the same page because the truth will be available for all to see.

Jim Brown

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