Guest Writings
19/08/04 OIL: 45 Bucks A Barrel. Get it cheap whilst it lasts by Edward Teague

The world in 2004 not short of oil. The world is short of oil production. Why? Underinvestment in new supplies, transport systems and refining capacity. Meanwhile the globe is gobbling up oil at an increasing and alarming rate. The International Energy Agency (”IEA”) estimated that the 2nd quarter of 2004 saw world demand rise at 5.2% above the same period in 2003. The booming Chinese economy in that period saw a 23% rise in consumption and in the US consumption rose 4.1% to 20.5 Million barrels a day fuelled by gasoline demand rising at 3% per annum – adding costs at every level of the economy.

But oil is now hitting US$47 a barrel, surely someone saw this coming ?

Well they did, for example Vice President, Dick Cheney in late 1999 said

“By some estimates, there will be an average of two percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves.” And he added, “That means by 2010 we will need on the order of an additional 50 million barrels a day.” That’s about six times what Saudi Arabia is struggling to pump today.

“Strategic Energy Policy Challenges For The 21st Century” the so-called Cheney Report commissioned by the Vice President Cheney and published in 2001 said “The most significant difference between now and a decade ago is the extraordinarily rapid erosion of spare capacities at critical segments of energy chains. Today, shortfalls appear to be endemic. Among the most extraordinary of these losses of spare capacity is in the oil arena.” What this report pointed out was that this shortage is different to any previous one. Why? Spare production capacity of OPEC (The oil producers price fixing cartel) stood at 25 percent of global demand, it fell to 8% in 1990 and has now evaporated.

Of this oil the Persian Gulf/Caspian Sea region accounts for 80% of world oil and natural gas production with “reserves” estimated to be 800 billion barrels of oil and an energy equivalent amount in natural gas. Totals in North and South Americas and Europe are less than 160 billion barrels and will be exhausted in the next 25 years. The UK North Sea field for example peaked in 1999 and are now running down so that the UK will soon be a net oil importer – it was briefly in September 2003 due to a refinery problem.

The Chairman of ExxonMobil in early 2003 stated that his company's output was not keeping up with demand: “When we consider, that as demand increases, our existing base production declines, we come squarely to the magnitude of the task before us. About half the oil and gas volume needed to meet demand 10 years from now is not in production today.”

The Cheney Report said,” “Over the next twenty years, U.S. oil consumption will increase by 33 percent, natural gas consumption by well over 50 percent, and demand for electricity will rise by 45 percent. If America's energy production grows at the same rate as it did in the 1990s, we will face an ever-increasing gap,” the report states, noting that the U.S. produces “39 percent less oil today than we did in 1970.” It concludes that if current trends continue, the U.S. will be importing two-thirds of its oil within 20 years — up from 37 percent in 1980.

The general assumption has been that the national oil companies of the producing countries (The world's major energy multinationals are blocked from investing in many of the world's richest producing countries) would make the investments needed to maintain enough surplus capacity to form a cushion against disruptions elsewhere. Not so.

Gulf States and their allies are not only finding their domestic and foreign policy interests increasingly at odds with US strategic considerations, as Arab-Israeli tensions flare, they are faced with domestic unrest, most vividly expressed in the policies espoused by Osama bin Laden. They have become less inclined to lower oil prices in exchange for security of markets, and evidence suggests that investment is not being made in a timely enough manner to increase production capacity in line with growing global needs. A trend toward anti-Americanism could affect regional leaders' ability to cooperate with the United States in the energy area.

The U.S. government has made clear that it is incapable of dealing with these mounting problems through conservation, ending the petro-dependence of the U.S. economy, or energy self-reliance.

The report argues that “energy security must be a priority of U.S. trade and foreign policy.”

So, if the national oilco’s won’t sell it to us at the price we want, and if they won’t let us invest in their oil industry. What do we do?

Simple. We invade their country and steal the oil.

Then what do you do? Well  on 22nd May just days after Mission Impossible was said to be Mission Accomplished, President Bush signed Executive Order 13303. It is in this context that one should consider firstly the absurd (but none the less real) Presidential Executive Order EO 13303 , signed with no fanfare by President Bush on May 22, 2003, immediately after “mission accomplished” (Hollow laughs not allowed) entitled, “Protecting the Development Fund for Iraq and Certain Other Property in Which Iraq Has an Interest.” It prohibits all judicial process — including, but not limited to, “attachment, judgment, decree, lien, execution, [and] garnishment” — with respect to the Development Fund for Iraq and all interests in Iraqi oil products. ( in support of these actions the EO invokes the International Emergency Economic Powers Act (IEEPA); the National Emergencies Act; section 5 of the United Nations Participation Act (UNPA); and 3 U.S.C. 301. … it also refers to “an unusual and extraordinary threat to the national security and foreign policy of the United States.”

The president simply declares this to be a “national emergency” and issues the blanket immunity. (Note that more recently on October 29th 2003 … Because the proliferation of weapons of mass destruction and the means of delivering them continues to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States, the national emergency first declared on November 14, 1994, (By President Clinton) must continue in effect beyond November 14, 2003. Consistent with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency declared in Executive Order 12938, as amended.).

Simply, this means that no court or litigant anywhere in the world can touch any of the oil products, interests in them, or proceeds. And in effect, it also means that it is useless to sue any company or person to try to get any of this — for even if a court were to issue an opinion saying you were entitled to it, that holding could never be enforced. (Indeed, the order explicitly says that a creditor cannot collect on a legally enforceable claim arising from Iraqi oil production.) For more on this see – Nuremberg, Iraq - What’s changed?

So there is a choke on production what else?

Most oil is pumped thousands of miles from where it’s wanted, it gets sent by pipeline or ship. Pipelines are fixed, expensive and inflexible. Ships are flexible, rentable and multi – sourced. However supplies are very limited due to lack of investment, but also because increasingly the insurers, fed up with picking up massive pollution bills demand double hulled vessels and also yards are switching to the increasingly complicated and expensive (and more profitable) liquid natural gas (LNG) carriers. This is reflected in higher shipping rates, for example General Maritime Corporation one of the largest US shippers operates a fleet of 50 tankers — 26 with a carrying capacity of approximately 5.6 million dwt.  Their recently reported 2nd Qtr 2004 results show that the average daily time charter equivalent, or TCE, rates obtained by the Company's fleet increased by 4.6% for 2nd Qtr 2004 compared with 2nd Qtr 2003 Spot charter rates increased by 9.5%.

TOP Tankers Inc. is Athens based, with a total carrying capacity of approximately 1.14 million DWT they hav just reported second-quarter net income of $15.8 million, or 90 cents a share, up from $4.5 million, or 26 cents a share, a year earlier.

Stelmar Shipping Ltd. said quarterly profit more than tripled as revenue from its vessels increased on global oil demand.

On the security front, all 49 of the companies surveyed indicated that they will have their International Ship and Port Facility Security (ISPS) plans implemented by the July 1 deadline, which requires each ship and shipping company trading in the United States to have a company-wide and fleet specific security plan.

Overseas Shipholding Group, Inc. is one of the largest tanker owners in the world and the leading U.S. based tanker company reported record net income for the first six months of 2004 of or $3.13 per share, an increase of 41% compared with net income of $86,075,000, or $2.50 per share, for the first half of 2003. They report shipping rates rising by 15%. The company sold the “Olympia” a 1990 built vessel for $40 Million a record price reflecting the market demand for second hand vessels.

During the second quarter the company states rates for modern VLCCs trading out of the Arabian Gulf averaged $64,500 per day,  62% more than the average rate for the corresponding quarter in 2003.

To add to their costs the Bush Administration  introduced International Ship and Port Facility Security (ISPS) plans to be  implemented by the July 1 deadline, which requires each ship and shipping company trading in the United States to have a company-wide and fleet specific security plan if they wish to unload or visit US ports. Lack of compliance will also push up already high cargo and structure insurance rates already at record highs due to war risks.

Furthermore in the US, no new oil refineries have been built for 28 years, indeed BP want to shut their 75 year old  California Bakersfield refinery and is being resisted by California Senators concerned that their voters pay too much for gas as it is.

The BP refinery in Indiana which suffered an explosion in it’s de-sulpherisation section last week has already added to tightness in the market and the hurricane season has already slowed production in the Gulf of Mexico as rigs are shut down.

So , there is shortage of production, difficulties with transportation, political instability, refining shortages in the US. What are the prospects?

Well, the oil market, like all markets operates like a casino. The players, the producers of oil, traders, users and mere financial speculators place bets. These are contracts for future delivery of oil. Each contract is for supply in a future month determined as ending on the last working day before the 15th of the month. So the current quotes for NYSE oil and Brent Crude are the US and UK market prices for oil for delivery in the “near” month, i.e September. However what is never quoted in the Press is the prices for delivery forward, these are as follows today. For oil delivered September $43.57, Oct $42.99, Nov $42.74, Dec 2004  $42.29 and even further into the future .. Dec 2005 $37.38.

So that means that the guys who spend their days trading oil don’t expect the price to vary much in the next 4 months – and you’d better listen to them rather than politicians.

So it looks like we’ve got high oil prices for the next 12 months?

Well, unless someone wants to start selling oil in Euros, just as Saddam Hussein did. Then that kicks out the crutches under the dollar and starts off the European / US war for world resources.

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