Tapped Out

Big Oil struggles to maintain production

The world's three largest fully publicly traded oil firms are investing billions of dollars more, but there is little sign yet the extra spending is leading to higher production. ExxonMobil, Royal Dutch Shell and BP posted falling 2007 output, even though they upped capital spending to over $60 billion and some expect a further rise this year. The drop reflects the way higher oil prices reduce the amount of oil companies get under production-sharing agreements with governments, and declining supply from aging fields in some regions like the North Sea. Shell and BP plan increases of up to 14% and 16% respectively in 2008. But much of the boost is being soaked up by rising costs, as well as the drop in the US dollar. Also, it takes years to bring new fields into production, meaning the impact of higher spending on supply is some way off. "The lead time between exploration and production is about seven to eight years," said analyst Jason Kenney of ING. "So new investment today is not going to come through until 2015 in terms of production, cash flow and earnings."

Big Oil's lower output comes alongside a broader failure for supply to meet expectations in recent years, particularly outside the Organization of Petroleum Exporting Countries. Part of the reason for that, say analysts, is declining output at fields already in production, such as in the North Sea, which raises questions whether new supply will lead to an overall gain in output. In a Feb. 4 report, Citigroup said there are over 175 large new oil projects due to start up by 2012 worldwide, although it remains to be seen whether they will be enough to counteract declines elsewhere. "The fear remains that most of this supply will be offset by high levels of decline, pointing to genuine difficulties in building net production levels, particularly after 2012," the bank said.
(Calgary Herald 080220)

Finally, the oil companies are starting to realize they need to start talking the truth and quit putting their quest for profits ahead of what could be a global energy catastrophe. To top it all off, the secrecy that surrounds the OPEC nations' reserves doesn't help the situation. No one knows how much easily-accessible oil is left in the Middle East, therefore I don't know how or why the 'experts' wonder how much of the premium (as they call it) on the current price of oil is speculative and how much is truly there because of some very large unknowns. Seems pretty weird that we're 100% dependent on the stuff, yet we truly don't know with any certainty how much is left in the ground that is economically viable to extract, refine and consume.

US$100 oil adds fuel to fears on economy

Oil reached US$100 a barrel yesterday, stoking new fears that the expensive commodity will further hurt an already fragile economy in North America. However, market experts said the price of oil will likely remain high and the economic impact in Canada and the US probably won't be as severe compared with recessions in the 1980s and 1990s. The benchmark price of oil closed at just over $100 a barrel, ending the trading day at $100.01, jumping $4.51 or 4.7%. In less than 10 days, oil has increased by more than $10 a barrel — and gasoline prices in Canada have surged as well, with the average across the country jumping to $1.09 a litre yesterday, up five cents from a week earlier, according to consultancy MJ Ervin & Associates. But while high oil and gasoline prices intensify worries about a worse-than-expected recession and spiralling inflation, the prevailing sentiment yesterday was that oil prices can remain aloft even as the North American economy slows, held up by demand from countries such as China and India. “The market has realized that regardless of what happens to the US economy, the fundamental supply-demand tightness in the oil market is not going away,” said Peter Tertzakian, chief energy economist at ARC Financial in Calgary. “The emerging economies have a critical mass now, a determination to grow despite what's going on in the US.”
(Globe and Mail, Calgary Herald 080220)

How matter-of-factly. Why isn't anyone worrying about the implications of all of this? If oil continues to move up in price, doesn't that indicate that an economic recovery in North America will be all the more difficult? The only possible respite here is that the supposed recession in NA and Europe will be so severe, that demand will go down the crapper and relieve some stress on global supply. But because SE Asia's internal market is self-sustaining now (almost), we can only expect demand to continue to increase. Doesn't that mean that by the time NA and Europe get things back in order, the price could be even higher, the long-term contracts to continue the container ships could be lost to China and India, and the economic barriers to entry (because of the price of our gooey lifeblood) could make things even more difficult to get things set up in the same way again? I can only see all of this ending up very badly...