Oily slicks

"The oil endowment is our inheritance, renewable energy is our hard earned wage."

Oil-price shock tops list of global economic risks

The good news about oil is that even if terrorists were to blow up key infrastructure around the world, there probably(emphasis added) would be enough reserves to make up the shortfall for as long as a year. At least that was the conclusion from a crisis simulation held at this year's World Economic Forum in Davos, Switzerland. The bad news: Oil prices would still soar as high as US$120 a barrel, and economists, ceos and risk analysts gathered at Davos still put an oil-price shock at the top of their list of global economic risks. Lack of spare output capacity and growing worries over geopolitics are making that more possible, they say. In fact, some economists say the US economy already is suffering from an oil-price shock. It just doesn't realize it yet. Research by Washington-based consultant Robert Wescott, a former International Monetary Fund and White House economist, suggests oil prices are already hurting stock prices, and may hurt profits and growth. Wescott looked at what has happened to US stock prices since 1950 when corporate profits rose sharply, as they did last year. He found that stocks rose by an average 21.5% when profits were up by 30% or more -- except in 2005. Last year, profits rose about 30%, but stocks were flat. In Westcott's view, oil prices are the key reason. "Oil prices have been creaming our companies," he said after the simulation. The only reason the oil-price surge hasn't hammered US growth, he said, is that job creation in housing-related sectors of the economy and mortgage-equity withdrawals have kept US consumers spending, despite higher gasoline and heating costs. As the housing market slows, he says, that cushion will disappear and the ill effects of expensive oil will become clear. He cited weak US growth figures for the fourth quarter of 2005, released last week, as evidence. Wescott's is a minority view. Most economists believe the oil-price rise of recent years has had little impact so far. But his contention underlines a general unease that with oil prices now over $60 a barrel, the global economy might not weather an additional runup the way it has handled the climb so far.
(Wall Street Journal 060130)

What about bird flu? Has everyone forgotten about bird flu?

Exxon Mobil makes record US$36.13B in 2005

High prices for oil and gasoline have driven Exxon Mobil to the biggest quarterly and full-year profits in US corporate history. On Monday, the company said it made US$10.71 billion in the fourth quarter and $33.13B for the year. The company owned the previous records for quarterly and annual profits. Exxon said it made $1.71 per share in the last three months of 2005, up from $1.30 a year earlier. Excluding onetime charges, the company made $1.65 per share, well ahead of the $1.44 that Wall Street analysts had been expecting. The firm's fourth quarter revenues also rose sharply, climbing to $99.66B from $83.37B a year ago. For the full year, Exxon made $5.71 a share, up from $3.89 in 2004. Full-year revenue rose to $371B from $298.04B
(CBC 060130)

Saudi Arabia says production should not be cut

Saudi Arabia's oil minister said the Organization of Petroleum Exporting Countries, the producer of more than a third of the world's crude, should not cut production when the group meets Jan. 31. "Absolutely not," Ali al-Naimi said in Vienna, echoing comments from Algeria's energy minister, Chakib Khelil. "Growth, economic growth" will drive Asian demand for energy this year, he said. Officials from Nigeria, Kuwait, the United Arab Emirates, Algeria and Indonesia in the past week expressed similar views. OPEC is pumping as much as it can to fill a widening gap between production from non-OPEC countries, which stagnated last year, and rising demand.
(National Post 060130)

Once again, the big question is: how much spare capacity is there left in the system? OPEC claims they have upwards of a few extra million barrels a day of extra capacity that can be brought onstream at a moments notice, but there is growing skepticism in the OPEC nations' numbers. Truth be told, no one really know for certain how much could be brought online in short order, and the only way we would know for sure is for it to happen, and figure out the numbers after the fact. A lot of people are making a lot of decisions based on guesstimates. Pretty scary stuff.

Saudi Arabia is currently producing around 8 million barrels a day, I think? They optimistically claim based on their probable reserves they can bring upwards of 10 to 15 million a day online over the next few years and into the far future. These claims are being used for long-term planning in all of the western countries (and now China and India along with Japan). The problem is that very few people are questioning the validity of these claims. Papers from Saudi Aramco (the national oil company) show they are doing secondary and tertiary remediation work on old, previously disappointing fields to simply make up for production declines in the giants and super-giants (of which a vast majority of the Middle East's production is from several mega-fields which are 50 to 70 years old). There has not been a major new field discovery in Saudi Arabia for twenty years. Should these probable reserves be as big as they are estimated to be? Does the disappointing history of these fields indicate that the probable reserves should be re-evaluated? There has been no pressure for Saudi Aramco (along with all the other OPEC nations' nationalized oil companies) to validate their proven reserves and to ignore the probable reserve numbers completely.

I think there at least is agreement that there is a lot of oil left in standard and unconventional forms. However, for the insatiable and out-of-control growth in appetite of the world economy, I think the biggest question is: how much of that oil that's left is cheap to get at? From the looks of it, everything that is coming down the pipes now is costing a lot more to produce than even ten years ago. This will be reflected in the prices we pay for everything very soon, how much the oil companies need to spend to get at the harder-to-get-at stuff, and how much they make as well.

Yet another good resource of information here.

"Look back over the past, with its changing empires that rose and fell, and you can foresee the future, too." Marcus Aurelius, Meditations, Book 8.