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Calling the bluff of cheap oil…
http://www.vheadline.com/readnews.asp?id=20984
VHeadline.com oil industry commentarist Andrew McKillop writes: We can start with a question: “Whatever happened to US$30 oil ?” to which the answer is: “Long gone”. Claude Mandil, current director of the IEA, has himself come out and stated the obvious – that the so-called 'right price' of oil at $22-28 per barrel is a fiction from the cozy Cheap Oil past. However, his coming out has already been leap-frogged by market prices in the real world, far ahead of $35 per barrel in daily trading for WTI, and close to 35/bbl for Brent.
Various writers and analysts — including Bob Woodward and Robert Baer — have worked the same Saudi and Russian oil fantasy lode that respected oil sector consultants like WoodMac also peddle for their profit. Basically this fantasy says, implies or claims that both Saudi Arabia and Russia, respectively N°1 and N°2 world oil producers (and exporters), can and will increase their production and their exports by simply impossible and delirious amounts.
A subset of this fantasy is to project world oil demand ahead, at growth rates that are usually far behind and below the real world, actual rate of 2.25%-2.5% annual. Doing this, even with deliberate underestimates of the growth rate, for the period through to 2015-20, soon generates awesome figures for world oil demand. Both the IEA and US EIA, as well as ExxonMobil (but most certainly not BPAmoco, placing its ostrich head in the sand and projecting annual growth at 1.3%!), have published 2020 forecasts in the region of 110-115 Million barrels per day (Mbd). Some estimates extend up to 120 Mbd. In other terms, at least 30-35 Mbd above today's production and consumption on an 'all liquids' base. This in fact already includes about 9 Mbd of tarsand, shale and syncrude oil, for which significant growth of output is stalled for the very simplest of reasons — oil is too cheap. Syncrude production only becomes 'interesting' at well over 50 US dollars/barrel.
Having generated a figure for demand growth — at least 30-35 Mbd over 14 years — we now have to satisfy this. The fast track is to say 'Saudi, Russia and West Africa'. The last, West Africa, is basically added to amuse the crowd by showing oil can be imported from somewhere outside Saudi Arabia and Russia, but we soon get to the real and serious meat.
The surprise, perhaps, is that a consulting firm like WoodMac can employ so many persons, and get paid so much for 'studies' that operate on a basis of 'double that number'. This is reserved for Saudi only, for the simple reason it is in the far-out impossible range to try the doubling game on Russian oil production or exports. The keyword is: game. The real world likelihood of even a 50% increase in Saudi production, and a 33% raise in Russian production over the next 15 years (and in both cases net EXPORT capacity will increase less than production) are close to zero. Any doubling scenario is a fantasy, that is all.
In 2003 as a year round average (using Wocap and other data) Saudi Arabia produced 8.67 Mbd and Russia produced 8.46 Mbd. Doubling Saudi production over 15 years would raise its production to 17.3 Mbd, but not double its export capacity, because of fast increasing domestic consumption, driven also by demographic growth still above 3% annual. Net export capacity with 17.3 Mbd production in 2020 would be around 15.75 to 16 Mbd, that is an increase of 8 Mbd from today's real export capacity on a year round base of around 7.75 – 8 Mbd.
Under no hypothesis, even the most fantasist, do we obtain a doubling of Russian net export capacity through 2020. The very best, such as touted by WoodMac, would be a raise of perhaps 6 Mbd. The total increase of export capacity obtained for Saudi Arabia + Russia, from a fantasy scenario projecting a doubling of Saudi production, and an 80% raise in Russian production would therefore be about 14 Mbd over 15 years.
World oil IMPORT demand growth is at this moment running at well above 2.5 Mbd annual, and this rate will inevitably increase, due to flagging production in the non-OPEC/non-exporter oil producer countries, and to fast-rising demand of China, India, Pakistan, Brazil, Iran, Turkey and other new industrial countries. China and India alone, on current trends, could raise their oil demand by 35-40 Mbd through 15 years, nearly all of which would be import-based.
The bottom line from this analysis, reinforced by 'emerging geopolitical trends', that is Middle East war spreading right across the region from its current hearths, is that cheap oil is dead. The only question is to forecast the price increase needed to cover massive investment needs in 'non conventional' oil, gas-to-oil conversion, energy transition and development of renewables, and the satisfaction of long-denied demands for wealth transfer to the South that just and equitable terms of trade would generate. The coming price range is likely in the US$50-75 per-barrel range, that is well below the inflation and purchasing power corrected price level of 1980.
Andrew McKillop is a former expert, policy and programming, Divn A-Policy, DG XVII-Energy, European Commission, founder member, Asian Chapter, Intl Assocn of Energy Economists. You may contact Mr. McKillop by email at AndrewMcKillop@compuserve.com
www.vheadline.com/mckillop More VHeadline.com commentaries by Andrew McKillop
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