Oil Exporters Are Unable To Keep Up With Demand
Those of you in the "Oil is a bubble" camp should read this article in today's WSJ, titled, Oil Exporters Are Unable To Keep Up With Demand:
"The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue.
Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.
There are several reasons behind the net-export decline. Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. At the same time, aging fields and sluggish investments have caused exports to drop significantly in Mexico, Norway and, most recently, Russia. The Organization of Petroleum Exporting Countries also cut production early last year and didn't move to boost supplies again until last fall.
In all, according to the Energy Department figures, net exports by the world's top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers."
We not only have strong demand, we have an ongoing supply problem. The map below reveals that the world's top 15 exporters are shipping 1 million barrels a day less in 2008 than in 2007:
Source:
Oil Exporters Are Unable To Keep Up With Demand
Domestic Needs, Sluggish Investment Crimp Shipments
NEIL KING JR. and SPENCER SWARTZ
WSJ, May 29, 2008; Page A8
http://online.wsj.com/article/SB121200725158327151.html
Public WSJ/Digg Version
http://digg.com/world_news/WSJ_com_Oil_Exporters_Are_Unable_To_Keep_Up_With_Demand
Thursday, May 29, 2008 | 10:00 AM | Permalink
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Comments
Theoretical question:
Is it possible we are both in a bubble and there is an ongoing supply problem?
I don't necessarily see the two as being exclusive, but perhaps I am wrong?
Posted by: Ferox.Obscurus | May 29, 2008 10:17:05 AM
Barry by this post and commentary last night I'm assuming your long oil. I think that's a really bad idea.
~~~
BR: We were long OIL from when it passed $32 back in 2003. Energy was my chosen sector for the annual Business Week forecast for 2004.
As I previously mentioned, my target for Crude was $125 -- and since that price, we have owned no Oil futures any longer. Maybe it goes higher, maybe not. As mentioned on K&C last nite, we are long Swift Energy (SWY) Enersys (ENS) and Arch Coal (ACI)
Posted by: John Borchers | May 29, 2008 10:20:23 AM
This article gives concrete evidence to support the view that oil production has peaked. It also contains evidence to support the Export Land Model, which if it's borne out will hasten the crunch in consuming countries, especially but not only the US, and which may actually make the precise peak moment sooner, and moot when it does come.
http://en.wikipedia.org/wiki/Export_Land_Model
Scary.
Posted by: bostonian | May 29, 2008 10:22:15 AM
Like I said earlier today, make it a transparent system and it will become obvious if the recent jump in energy prices is based on supply and demand or manipulation. Until then, it's just a playground argument. Given the thieves who control oceans of capital and the knowledge of how to use it, I'm betting on a bubble. Only a fool would take a sucker bet in the stock market without knowing if the system is gamed or not.
I distinctly remember sitting around a table and arguing with others about the first time we ran out of oil a couple of decades ago. Anyone who said the oil shortage was a fraud or contrived in some way was looked at as a kook. The 'kooks' were apparently right. I suppose the kooks who claimed house prices were in a bubble were also wrong? Or how about the kooks who thought 'mark to model' is a screwy idea? Didn't Enron rape the people of California by manipulating energy contracts, and it was all legal. I believe all participants in these markets claimed 'supply and demand' and circular logic as proof as the rightness of these positions.
I just found the Farm Bill, and the Enron Loophole was closed. However it won't be effective for about 6 months. Now transparency need to be added to all other aspects of energy trading.
Posted by: cinefoz | May 29, 2008 10:28:41 AM
The demand/supply quandary is an inflation-induced illusion.
Why sell and ship today, when you can wait a few days/weeks/months and get 5-10% for the trouble?
In fact, in this regime of screaming oil price increases, it befuddles me why any oil producer would want to sell today what they can sit on for a fat profit tomorrow.
Of course, this can't go on forever. When it ends, oil will crash--below where it started its climb last fall. But that will require a grown-up at the helm of the monetary policy ship in the US. It may take awhile.
Posted by: DonKei | May 29, 2008 10:35:31 AM
Export land model explains some of what I'm hearing from local folks monitoring the Saudi situation. One was just a couple days ago citing reports that the Saudis are drilling and then capping wells as if to bank them for future generations. His read was that they were banking on prices continuing to rise, but the increase in internal demand aspect is one I hadn't thought about.
That said, oil industry people are like global warming folks - the end is always only several years ago - and still they manage to find oil many many years and decades past doomsdays past.
For fun past perspective see The Coal Question, a book written in 1906 when "peak coal" was just a few short years off. It's available as a free download on Google Book search. http://books.google.com/books?id=gAAKAAAAIAAJ&dq=william+stanley+jevons+%22the+coal+question%22&pg=PP1&ots=M4b6VPpkEQ&sig=DV3ZQg7b0oIIZIB-o0gVEVvWtms&prev=http://www.google.com/search%3Fq%3DWilliam%2BStanley%2BJevons%2B%2522the%2Bcoal%2Bquestion%2522%26sourceid%3Dnavclient-ff%26ie%3DUTF-8%26rlz%3D1B3GGGL_enUS230US230&sa=X&oi=print&ct=title&cad=one-book-with-thumbnail#PPA17,M1
Remember how the US adapted when the world "ran out" of coal?
Posted by: Aaron | May 29, 2008 10:38:56 AM
Donkei said:
In fact, in this regime of screaming oil price increases, it befuddles me why any oil producer would want to sell today what they can sit on for a fat profit tomorrow.
Reply: Well said, and I suspect there is just enough volatility in oil prices to make both sides of the trade profitable for index traders, especially in a market that is gamed to go up over a short time.
Posted by: cinefoz | May 29, 2008 10:41:04 AM
I do not have the WSJ subscription and so I can't read the whole article but one data point I do not see in the excerpt or in the graph is the net change in oil exports from those countries NOT in the top 15.
This would complete the picture. Does anyone have data on this?
Posted by: Sonic Seuss | May 29, 2008 10:47:21 AM
EIA report, huge draws. 8.8m b. I can't remember a draw that large, ever.
No evidence of demand destruction there.
Posted by: zackattack | May 29, 2008 10:52:16 AM
zackattack,
Or, it might mean that old, low cost inventory is being run down because current prices are too high and possibly expected to go down. Maybe actual buyers, as opposed to index traders, are betting on lower prices coming around before inventory levels become critically low? Could this be a bad sign for bubble buyers?
Posted by: cinefoz | May 29, 2008 10:56:51 AM
Mexico currently supplies 14% of US oil. Their fields are declining at a rate that they will be a net importer of oil in 6 years. Who will replace this 14%?
Short-term anything can happen. Medium term, oil is going higher.
Posted by: Jim | May 29, 2008 11:00:17 AM
Nothing in that article indicates that there is a shortage situation, only that suppliers are not putting more product on the market at todays prices. This may be justified if the suppliers believe demand is adequately met and that prices are a bubble, which means by pumping more they would actually kill the bubble and their golden goose.
Posted by: Andrew | May 29, 2008 11:05:05 AM
I dunno. Short-term, I got my longs protected on last weeks "CNBC Special Report: America's Oil Crisis" and the BenSteinery in the NYT. These are not signs of a bottom.
Rule of 20x in a bubble. Taking oil's starting point as the Fall, 1999 Economist cover "A world awash in oil", this would yield about $250 crude at the top.
But I don't know that we've ever seen a bubble in something the world relies upon for its continued existence.
All the other bubbles have essentially been in financial instruments. Even the 70s oil bubble was really just OPEC's reaction to Nixon's abandonment of the gold standard; there, the pumps could've been turned on again at any time.
Posted by: zackattack | May 29, 2008 11:09:54 AM
If I remember correctly, there was a huge supply problem in housing in 2005. There was no new land getting created and that was the reason why the burgeoning population of the US was causing prices to go up.
Of course, this time it is different for you, Barry. Good luck. :)
~~~
BR: You remember incorrectly.
The problem was not one of land. Rates were dropped to historically low levels at the same time that Bank lending standards all but disappeared. Just about anyone who asked, applied for a mortgage -- regardless of credit score, down payment, income or home value -- got a mortgage.
Your understanding of the housing situation is woefully, painfully inadequate.
Posted by: DMR | May 29, 2008 11:11:11 AM
Saudis might be deciding that oil in the ground is worth more than US Treasuries in the vault.
If we hadn't screwed up in Iraq, there would be much more supply available.
Posted by: Mel | May 29, 2008 11:29:30 AM
I can see more people have figured it out in the market. Gold is continuing to deflate. Oil should come with it next and take the market with it.
Posted by: John Borchers | May 29, 2008 11:37:04 AM
Good point DMR but I think we are seeing that these oil producing countries are a little smarter than home builders, no? They are holding back on production. The problem with the export land model is that eventually, with ridiculous price increases that we have seen, you hurt your own GDP. Basically price your own people out. You have to massage the price for long term and that is certainly out the window here. Do you really think OPEC wants soccer mom Jane getting rid of her excursion to drive a hybrid? The people who want oil at 150 are investors who look to gain from the increase.
It's a hedge against poor equities and failing financials, not peak oil. Play at your own risk. I'm an amatuer so I'll just sit back and watch the fireworks.
Posted by: Ken H. | May 29, 2008 11:41:28 AM
for non-believers, why is it so hard to imagine that if suppliers have monopoly and they know that the world has limited supply(20 years time horizon) why would they not just hoard it(simply keep output low).
in the short term oil may crash to $70-80, it may as well go to $200.
(it all depends on what the govs of powerful countries want to happen, since oil is very crucial, it can also mean war and regime change, if it is against govs of powerful countries)
but long term oil is in limited supply unless all the data we have been given is a lie.
Posted by: techy | May 29, 2008 11:44:57 AM
Ouch Barry,
That's harse on old DMR. I think his argument was poorly stated though. I took his meaning to be that there was the claim by builders, realtwhores, and mortgage brokers that one should buy now at inflated prices because there was a shortage of land to build on. This can be synonymous with claims of peak oil, no?
This all becomes an issue of credibility and trust. Do I trust reports of ageing fields in Saudi Arabia and Russia? Unfortunately due to the recent bubbles, Enron, and World Com scenarios it makes it hard to believe that the doubling in oil prices is fundamental
~~~
BR: My problem with his ilk is lack of accountability -- publishes under multiple names (DMR, Matt, Monty Burns, Contrarian), w/o an email address, no ID, no website.
From troll-like behavior, what else can I conclude? He's a likely troll.
Posted by: Ken H. | May 29, 2008 11:56:07 AM
Barry,
I wonder if there are any studies of the impact high oil prices have on supply (I'm thinking specifically of nationalized oil) and how that might be increasing prices. Let's say you are a government and you have expected expenditures of x. If the price of oil goes up, you'll cut back production and save it for later years. I would assume this would be particularilly true the less democratic the government, but that is debatable. I wonder what the magnitude of such thinking might be, and what it's %age impact on the total price increase is, and if it creates a circle of continuing price increases,and whether or not it is only academic or matters.
How much of the price increase is peak oil, and how much is self-serving interest?
Posted by: smash | May 29, 2008 12:06:19 PM
Here's a parody of an argument used by people who don't believe in AGW and Peak Oil:
"Remember that 'experts' once claimed the world was flat? It just goes to show you can't trust experts."
Yes, for every valid theory on any subject, I can find someone who guessed way off the mark. For some anti-PO and anti-AGW folks, finding an invalid prediction -- however old or narrowly held -- is apparently "QED".
Amazing...
Posted by: wunsacon | May 29, 2008 12:17:39 PM
Of course supply was weak compared to demand in 2007. Oil has rallied from 50 bucks to 135 bucks in less than 18 months....of course "someting" is going on that is bullish. That's NOT the relevant question. The key question is how much of all the bullish news and information is priced into the market? I think given the massive dump into wildly bullish data today...it suggests we're getting pretty damn close to a near term peak.
-AT
Posted by: Andy Tabbo | May 29, 2008 12:26:44 PM
Has anyone else noticed a decrease in traffic on the road?
Posted by: Boiled Frog | May 29, 2008 12:29:10 PM
Barry wrote: "Rates were dropped to historically low levels at the same time that Bank lending standards all but disappeared"
The reduction of interest rates is across the board. The same low interest rates that allow Joe BurgerFlipper to buy a house are the same low rates that are pushing the dollar down. Priced in Euros, or any other currency not linked to the dollar, the price is up but not of the historic proportions we are seeing.
Lower bank lending standards is not a cause, it is a symptom of the end game in a bubble. Banks lowered their standards when expectations for 20% gains became the norm and could not be met in 2006...the subprime mess started after the primary market already peaked...it just prevented the market from crashing till 2007. With Dodge trying to pay us for gas to buy their trucks and plans for Gas Tax holidays, I can imagine that demand will stay high longer than supplies warrant. But, once there is
(1) Large scale reduction in automobile and aviation consumption
(2) Sharp drop in imports due to pinched wallets in the US, knocking those millions of Indian/Chinese consumers off their feet
the Peak Oil side of the story will quietly go away.
~~~
BR: My problem with you -- aside the fact that much of what you write is indecipherable nonsense -- is a lack of accountablility. Normally, I would email this to you privately, but:
Under IP address 159.53.78.140, you publish under multiple names (DMR, Matt, Monty Burns, Contrarian) , bad email address, no ID, no website.
That, plus half of your posts begin OFFTOPIC.
Get a real email address, name (or website), and I will take you seriously.
Posted by: DMR | May 29, 2008 12:44:52 PM
One thing I'm missing everywhere is that I don't see any shortages at the pumps anywhere in the world. No rationing nor long lines....
Just prices that go up.... There's got to be a trick to all this, no? Less oil being pumped out of the ground, yet the supply of it's derivative products are aplenty. What gives?
Posted by: casin | May 29, 2008 12:47:57 PM
