Deutsche Bank is now convinced OPEC will run out of spare capacity in 2012 as increasing demand exceeds existing global production. The result is not pretty.
I just finished reading an excellent report by Deutsche Bank analysts on the approaching end of the oil age. Actually it should have been titled the end of the "cheap" oil age and more people would have read it.
I am going to give you the link to the report later in this commentary but I will try to hit the high points first.
Deutsche Bank (DB in future sentences) analysts studied the individual demand and production numbers by country to arrive at projections for each through 2012. They compared it with trends in 2009 and 2010 and came up with the same facts I have been preaching for the last year.
Without a sudden increase in produced oil or a sudden decrease in demand the OPEC charade of excess capacity will disappear under the harsh impact of rising prices.
DB said most observers believe OPEC has around 5.0 mbpd of spare capacity in a market that is growing demand at an average of 1.5 mbpd. DB believes demand in 2010 actually rose about 2.0 mbpd and that will continue at an even higher rate into 2011 because of the abnormally cold weather and stronger demand from Asia.
Based on previously sustained maximum levels of production, levels we actually know were possible at one time, they believe "actual" OPEC spare capacity is closer to 4.0 mbpd. (Just claiming you have X barrels of spare capacity does not hold up under investigation until you have actually produced at that level for more than a few days.) There is an interesting table on page 9 of the report showing OPEC capacity or lack of spare capacity.
DB argues that demand growth in 2011 could be in the neighborhood of 2.5 mbpd and that would reduce OPEC proven spare capacity by more than half. It would also leave the world short of oil in 2012 unless somebody quit using it.
In the image below they give two options. With Iraq ramping up and with Iraq stagnating.
Disappearance of spare capacity
According to DB, given inelasticity of Middle East and China demand, and high taxes and efficiency in Europe, that demand has to be broken in the US.
The U.S. is the biggest consumer and therefore the most susceptible to oil price shocks and the demand that is the most easily destroyed.
DB believes the higher gasoline prices will drive down demand in the U.S. and force a switch to electric cars over the next few years. With battery costs dropping and gasoline costs rising it will become cost effective for most consumers to make the switch. Today's high cost electric cars and hybrids force the majority of U.S. consumers to continue to drive low mileage gasoline vehicles. That is about to change as consumers are forced into electrics by the high cost of operating gasoline vehicles.
The analysts believe the U.S. will continue to restrict offshore drilling in some form possibly past 2011 and leading to a serious decline in U.S. production. The Gulf of Mexico was our domestic growth area for oil production. The Bakken production is improving but those wells are such slow producers it takes hundreds to make any material difference. For instance Hess has a five-year plan in the Bakken that will only build them to 80,000 bpd and that is the equivalent of just one good well in the Gulf.
DB lays out three reasons why President Obama is not likely to accelerate permitting in the Gulf.
1) An increase in activity would mostly benefit Texas and Louisiana, two states that are squarely Republican in terms of Presidential election politics
2) A large portion of Obama's base doesn't want a return to aggressive permitting in the Gulf
3) More activity means more risk of another incident, which would be a disaster for 2012
The new director of the MMS now called BOEM, has no background in oil or gas. He does have a deep background in government regulation and investigating troubled government entities. He will grade himself on the rigor of oversight and the absence of accidents rather than the number of wells drilled and taxes collected on production. This is not a positive environment for oil exploration. DB believes it will be a negative as far out as 2016.
It should come as no shock that the vast majority of the world's remaining oil reserves are held by OPEC in primarily Muslim countries. These countries are unstable politically, don't really like the U.S. and have serious unemployment problems. They have a young population that does not like being told what to do and are constantly pressing the boundaries. Our fate rests on continued production from these countries.
The country with the biggest opportunity to impact global production is Iraq. DB believes they can ramp up from their current 2.5 mbpd to 6.0 mbpd by 2020 assuming the political situation, physical problems, security issues and dealings with Iran can be resolved. That is a lot of very big problems to overcome especially if the U.S. pulls out by the end of 2011. Many analysts believe Iran is already in control of up to 35% of the country and they are just waiting for the U.S. to leave to take over the rest. That would not be conducive to continued ramping up of production by the world's oil majors who have contracted to renovate the fields.
The DB analysts took all the factors into consideration concerning current production trends and current demand and predict a peak in supply as early as mid 2012 or as late as 2016. They incorporated the decline estimates fro IEA, XOM and BP and believe decline from existing fields will rise from the current 5% annually to 8% by 2030. That requires a massive 317 billion barrels of new oil to be found and developed by 2030. They have two chances of that happening, "slim and none."
New production required
They go on to point out that new oil production today has a cost basis of $65 to $85 a barrel with prices rising to $100 in the near future. That suggests prices are not going down at the pump over the long term. For many developments a price of $95 would be required to make them commercially profitable with some developments requiring up to $125 per barrel.
I am providing a link to the DB report, "The End of the Oil Age 2011 and beyond: A Reality Check" because I believe it is something everyone should read. It cuts through the fog provided by the network commentators and provides some hard facts about future expectations. Report Link
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter
See a list of our closed plays from 2010 here: Closed Positions