BonzoHansen
11-08-2007, 10:18 AM
Here are some opposing viewpoints on oil prices….enjoy(?)
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Why $100 Oil Can't Float
Justifications for the Price, Like Supply and the Dollar, Crumble Under Economics
By CYRUS SANATI November 8, 2007; Page C14 WSJ
With oil flirting with $100 a barrel, there seems to be no stopping the dizzying ascent of black gold. In such a frothy market, it may seem old-fashioned to talk about supply and demand. But they and other fundamentals give a clear message: The price is too high to be sustainable.
There are 10 solid reasons why:
1. Supply above ground is abundant. The amount of oil in storage tanks around the world is near all-time highs -- 4.2 billion barrels at the end of June in the industrialized countries of the Organization for Economic Cooperation and Development alone, according to the U.S. Energy Information Administration.
Falling inventories in the U.S. have received a lot of attention, and the EIA does predict slightly lower stocks by year-end. But this has more to do with inventory management than a lack of supply.
2. Supply below ground is abundant. The world's proven reserves are now at 1.4 trillion barrels, up 12% in the past 10 years, according to BP.
That's not even counting the estimated 1.7 trillion barrels of oil locked in Venezuela's Orinoco tar sands. Combined, that comes to a century of production at the current rate.
3. Production is set to increase. Sustained high oil prices have encouraged drilling. There are 45% more oil rigs in service today than there were three years ago. New rigs are more productive than old ones and new technology is helping to squeeze more oil out of old fields.
4. The cost of production is much less than $100 a barrel. Even with oil-services costs soaring, Royal Dutch Shell's lifting cost per barrel of oil equivalent in 2006 was about $9, according to energy research firm John S. Herold. Extracting oil costs Saudi Aramco, the Saudi Arabian producer, an estimated $4 to $5 a barrel.
The full cost of new production -- including both capital and operating-cost components -- in the most challenging oil fields, for example in Canada's oil sands, is perhaps $30 a barrel. Oil prices can fall heavily without making any of this production uneconomic.
5. Iranian exports aren't likely to be cut. The U.S. is in practice unlikely to take military action against an adversary three times the size of Iraq. And with oil exports accounting for 50% of Iran's gross domestic product and 90% of its hard-currency earnings, a self-imposed cut in exports would be self-destructive.
In any event, the world has the equivalent of nearly three years of Iranian production in storage, according to research from Oppenheimer. This risk shouldn't be a big factor in oil prices.
6. High prices are pulling back demand. Oil consumption in the U.S. fell by 1.3% in 2006 and world-wide demand grew a measly 0.6%, according to BP.
World-wide, demand this year is expected to be flat compared with last year. Exxon Mobil cut its long-term forecast for oil-consumption growth this week.
7. High prices are forcing governments to cut subsidies. Iran is rationing gasoline, and last week China ordered a 10% increase in oil-product prices. That should curb demand growth, too.
8. Energy from oil is looking expensive compared with energy from gas. Oil by the barrel has usually traded at six to 10 times the price of natural gas (measured per million British thermal units). It is currently at 13 times.
9. The weak dollar is a poor excuse for high oil prices. Since Aug. 22, the dollar is down by only 8% against a basket of currencies while the oil price has risen by 40%.
10. Speculation is artificially boosting prices. A speculator needs to put down only $4 per barrel as margin to bet on the oil price in futures markets. The net volume of open crude-oil contracts held by financial players is up 50% since August, when the credit crunch made it harder to make leveraged bets in some other markets. This looks like short-term, hot money.
• This column is by breakingviews.com, an online financial commentary site.
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Why Oil May Not Stop at $100
As Reservoirs Age and Demand Grows, Prices May Go Even Higher
By NEIL KING JR. and GUY CHAZAN
October 31, 2007; Page A6 WSJ
LONDON -- Oil at $100 a barrel? That may not be the worst of it.
Several leading oil experts, gathered here yesterday for an annual energy conference, sketched a near-term future in which mounting global demand and shrinking supplies push oil prices well past the $100-a-barrel mark.
Consuming countries, they argued, will simply have to deal with the fact that new pockets of oil are getting far harder and more expensive to tap. That, combined with years of underinvestment by the industry, has led to a tapering off of new oil supplies that will continue for years, despite rising energy demand in Asia, the Middle East and some industrialized countries.
Yet on a day when U.S. benchmark oil prices retreated from Monday's record, closing down $3.15 a barrel, or 3.4%, to $90.38 on the New York Mercantile Exchange, two ministers from the Organization of Petroleum Exporting Countries at the same gathering insisted that the immediate problem isn't too little oil.
Prices have jumped nearly 40% since early summer, the oil ministers of Qatar and the United Arab Emirates said, because of the slumping dollar, widespread Wall Street speculation and bottlenecks in the refining process.
"Please don't blame us" for record oil prices, said Abdullah al-Attiyah, Qatar's minister of oil, expressing a sentiment that is widely held among major oil-producing countries. "You have blamed us for 50 years."
Hard to Pinpoint Cause
The debate over what is driving the surge in oil prices is sure to get more spirited if prices continue to soar and oil executives, consumers and politicians seek to assign blame. But the feuding theories at this year's Oil & Money conference also show how hard it is to pinpoint a cause.
Sadad I. Al-Husseini, an oil consultant and former executive at Aramco, Saudi Arabia's national oil company, gave a particularly chilling assessment of the world's oil outlook. The major oil-producing nations, he said, are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."
A lot of production in the Middle East is from mature reservoirs, and the giant fields of the Persian Gulf region, he said, are 41% depleted.
Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Mr. Husseini said. He predicted that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.
Nobuo Tanaka, the new executive director of the Paris-based International Energy Agency, which is funded by the world's leading industrialized consumer nations, said he sees little likelihood the world's spare capacity for oil production will increase notably in the near future, partly because so many oil-rich countries continue to shun outside investors.
"The IEA says that despite the high oil price, market tightness will increase from 2009, because new capacity additions won't keep up with reduced capacity from existing fields," he said.
IEA analysts insist that a sufficient resource base exists to supply demand through 2030, but Mr. Tanaka said he isn't confident there will be enough investment, skilled workers and technology to actually get to that oil "in a timely manner."
Andrew Gould, the chairman and chief executive of Schlumberger Ltd., an oil-services company, expressed similar concerns, noting that 70% of the oil fields that now quench world demand are more than 30 years old. The growth in global demand since 2003, he said, has been roughly the equivalent of the daily output from two of the world's larger suppliers: the North Sea and Mexico.
"Our industry simply cannot cope with these kinds of increases," Mr. Gould told the assembly. OPEC countries supply about 40% of world production. But that slice is expected to increase in coming years as output decreases in non-OPEC countries such as Mexico and Russia. Saudi Arabia, the world's largest single supplier, is looking to increase production substantially into the next decade.
But with oil prices now flirting with $100 a barrel, OPEC officials have been aggressive in batting aside talk that they are to blame. "The market is increasingly driven by forces beyond OPEC's control, by geopolitical events and the growing influence of financial investors," said Mohammed bin Dhaen al-Hamli, the United Arab Emirates' oil minister, who also serves as OPEC's president.
'Fed Up' With Blaming OPEC
Mr. Hamli said prices still are "far below" the all-time inflation-adjusted high of $101 a barrel, set in the spring of 1980 after the 1979 Iranian revolution shocked oil markets. His Qatari counterpart, Mr. al Attiyah, noted that gold prices also have been skyrocketing. "Why are people concentrating on oil and closing their eyes on gold?" he asked, adding later that he is "fed up" with people blaming OPEC for fluctuations in oil prices.
Both ministers said the cartel won't formally consider whether to increase supplies to the world market during a heads-of-state meeting in Saudi Arabia next month. The group agreed last month to add about 500,000 barrels a day to world production, effective Nov. 1.
A top official at the Energy Department disputed OPEC's claim that supply isn't an immediate challenge. "We think the market still needs more barrels, as we look toward the next year or so," said Guy Caruso, an administrator at the department's Energy Information Administration. "The problem is we don't have cushions," in terms of spare production capacity and spare crude stocks, he said. "We have relatively low and declining inventories and a refining sector that's finding it hard to get the crude it needs."
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Why $100 Oil Can't Float
Justifications for the Price, Like Supply and the Dollar, Crumble Under Economics
By CYRUS SANATI November 8, 2007; Page C14 WSJ
With oil flirting with $100 a barrel, there seems to be no stopping the dizzying ascent of black gold. In such a frothy market, it may seem old-fashioned to talk about supply and demand. But they and other fundamentals give a clear message: The price is too high to be sustainable.
There are 10 solid reasons why:
1. Supply above ground is abundant. The amount of oil in storage tanks around the world is near all-time highs -- 4.2 billion barrels at the end of June in the industrialized countries of the Organization for Economic Cooperation and Development alone, according to the U.S. Energy Information Administration.
Falling inventories in the U.S. have received a lot of attention, and the EIA does predict slightly lower stocks by year-end. But this has more to do with inventory management than a lack of supply.
2. Supply below ground is abundant. The world's proven reserves are now at 1.4 trillion barrels, up 12% in the past 10 years, according to BP.
That's not even counting the estimated 1.7 trillion barrels of oil locked in Venezuela's Orinoco tar sands. Combined, that comes to a century of production at the current rate.
3. Production is set to increase. Sustained high oil prices have encouraged drilling. There are 45% more oil rigs in service today than there were three years ago. New rigs are more productive than old ones and new technology is helping to squeeze more oil out of old fields.
4. The cost of production is much less than $100 a barrel. Even with oil-services costs soaring, Royal Dutch Shell's lifting cost per barrel of oil equivalent in 2006 was about $9, according to energy research firm John S. Herold. Extracting oil costs Saudi Aramco, the Saudi Arabian producer, an estimated $4 to $5 a barrel.
The full cost of new production -- including both capital and operating-cost components -- in the most challenging oil fields, for example in Canada's oil sands, is perhaps $30 a barrel. Oil prices can fall heavily without making any of this production uneconomic.
5. Iranian exports aren't likely to be cut. The U.S. is in practice unlikely to take military action against an adversary three times the size of Iraq. And with oil exports accounting for 50% of Iran's gross domestic product and 90% of its hard-currency earnings, a self-imposed cut in exports would be self-destructive.
In any event, the world has the equivalent of nearly three years of Iranian production in storage, according to research from Oppenheimer. This risk shouldn't be a big factor in oil prices.
6. High prices are pulling back demand. Oil consumption in the U.S. fell by 1.3% in 2006 and world-wide demand grew a measly 0.6%, according to BP.
World-wide, demand this year is expected to be flat compared with last year. Exxon Mobil cut its long-term forecast for oil-consumption growth this week.
7. High prices are forcing governments to cut subsidies. Iran is rationing gasoline, and last week China ordered a 10% increase in oil-product prices. That should curb demand growth, too.
8. Energy from oil is looking expensive compared with energy from gas. Oil by the barrel has usually traded at six to 10 times the price of natural gas (measured per million British thermal units). It is currently at 13 times.
9. The weak dollar is a poor excuse for high oil prices. Since Aug. 22, the dollar is down by only 8% against a basket of currencies while the oil price has risen by 40%.
10. Speculation is artificially boosting prices. A speculator needs to put down only $4 per barrel as margin to bet on the oil price in futures markets. The net volume of open crude-oil contracts held by financial players is up 50% since August, when the credit crunch made it harder to make leveraged bets in some other markets. This looks like short-term, hot money.
• This column is by breakingviews.com, an online financial commentary site.
--------------------------------------------------------------------------------------------------------------
Why Oil May Not Stop at $100
As Reservoirs Age and Demand Grows, Prices May Go Even Higher
By NEIL KING JR. and GUY CHAZAN
October 31, 2007; Page A6 WSJ
LONDON -- Oil at $100 a barrel? That may not be the worst of it.
Several leading oil experts, gathered here yesterday for an annual energy conference, sketched a near-term future in which mounting global demand and shrinking supplies push oil prices well past the $100-a-barrel mark.
Consuming countries, they argued, will simply have to deal with the fact that new pockets of oil are getting far harder and more expensive to tap. That, combined with years of underinvestment by the industry, has led to a tapering off of new oil supplies that will continue for years, despite rising energy demand in Asia, the Middle East and some industrialized countries.
Yet on a day when U.S. benchmark oil prices retreated from Monday's record, closing down $3.15 a barrel, or 3.4%, to $90.38 on the New York Mercantile Exchange, two ministers from the Organization of Petroleum Exporting Countries at the same gathering insisted that the immediate problem isn't too little oil.
Prices have jumped nearly 40% since early summer, the oil ministers of Qatar and the United Arab Emirates said, because of the slumping dollar, widespread Wall Street speculation and bottlenecks in the refining process.
"Please don't blame us" for record oil prices, said Abdullah al-Attiyah, Qatar's minister of oil, expressing a sentiment that is widely held among major oil-producing countries. "You have blamed us for 50 years."
Hard to Pinpoint Cause
The debate over what is driving the surge in oil prices is sure to get more spirited if prices continue to soar and oil executives, consumers and politicians seek to assign blame. But the feuding theories at this year's Oil & Money conference also show how hard it is to pinpoint a cause.
Sadad I. Al-Husseini, an oil consultant and former executive at Aramco, Saudi Arabia's national oil company, gave a particularly chilling assessment of the world's oil outlook. The major oil-producing nations, he said, are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."
A lot of production in the Middle East is from mature reservoirs, and the giant fields of the Persian Gulf region, he said, are 41% depleted.
Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Mr. Husseini said. He predicted that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.
Nobuo Tanaka, the new executive director of the Paris-based International Energy Agency, which is funded by the world's leading industrialized consumer nations, said he sees little likelihood the world's spare capacity for oil production will increase notably in the near future, partly because so many oil-rich countries continue to shun outside investors.
"The IEA says that despite the high oil price, market tightness will increase from 2009, because new capacity additions won't keep up with reduced capacity from existing fields," he said.
IEA analysts insist that a sufficient resource base exists to supply demand through 2030, but Mr. Tanaka said he isn't confident there will be enough investment, skilled workers and technology to actually get to that oil "in a timely manner."
Andrew Gould, the chairman and chief executive of Schlumberger Ltd., an oil-services company, expressed similar concerns, noting that 70% of the oil fields that now quench world demand are more than 30 years old. The growth in global demand since 2003, he said, has been roughly the equivalent of the daily output from two of the world's larger suppliers: the North Sea and Mexico.
"Our industry simply cannot cope with these kinds of increases," Mr. Gould told the assembly. OPEC countries supply about 40% of world production. But that slice is expected to increase in coming years as output decreases in non-OPEC countries such as Mexico and Russia. Saudi Arabia, the world's largest single supplier, is looking to increase production substantially into the next decade.
But with oil prices now flirting with $100 a barrel, OPEC officials have been aggressive in batting aside talk that they are to blame. "The market is increasingly driven by forces beyond OPEC's control, by geopolitical events and the growing influence of financial investors," said Mohammed bin Dhaen al-Hamli, the United Arab Emirates' oil minister, who also serves as OPEC's president.
'Fed Up' With Blaming OPEC
Mr. Hamli said prices still are "far below" the all-time inflation-adjusted high of $101 a barrel, set in the spring of 1980 after the 1979 Iranian revolution shocked oil markets. His Qatari counterpart, Mr. al Attiyah, noted that gold prices also have been skyrocketing. "Why are people concentrating on oil and closing their eyes on gold?" he asked, adding later that he is "fed up" with people blaming OPEC for fluctuations in oil prices.
Both ministers said the cartel won't formally consider whether to increase supplies to the world market during a heads-of-state meeting in Saudi Arabia next month. The group agreed last month to add about 500,000 barrels a day to world production, effective Nov. 1.
A top official at the Energy Department disputed OPEC's claim that supply isn't an immediate challenge. "We think the market still needs more barrels, as we look toward the next year or so," said Guy Caruso, an administrator at the department's Energy Information Administration. "The problem is we don't have cushions," in terms of spare production capacity and spare crude stocks, he said. "We have relatively low and declining inventories and a refining sector that's finding it hard to get the crude it needs."
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