Pumping all they can?

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Henry_Chinaski
Board Lord

Joined: Aug 16, 2003
Posts: 5025

Posted: Aug 07, 2004 - 02:21 PM
Post subject: Pumping all they can?

Pumping all they can?

Aug 6th 2004
From The Economist Global Agenda

As the oil price rose to a new high of more than $44 a barrel this week, amid concerns about supply, OPEC’s president said the cartel was unable to pump more oil and thus bring down the price. He later contradicted these comments, but observers remain sceptical about OPEC's ability to turn on more taps

ANYONE who expected that the invasion and occupation of Iraq would lead to a sharp decline in the price of oil has been sorely disappointed. Instead of falling, the price has risen sharply, and this week West Texas crude rose above $44 a barrel for the first time since New York’s Nymex exchange started trading oil 21 years ago.

Not only has Iraq’s oil industry, hampered by creaking infrastructure and sabotage, been unable to pump anything like its potential capacity, but supply elsewhere is under pressure too. Last week, it appeared that Yukos, Russia’s biggest oil producer, might be forced to stop production, as part of its ongoing battle with the country’s tax authorities. That fear proved unfounded, but it still appears that some in the Kremlin are bent on destroying Yukos, and oil traders remain nervous.

They are also worried by the apparent impotence of the Organisation of the Petroleum Exporting Countries (OPEC). On Tuesday August 3rd, Purnomo Yusgiantoro, president of OPEC and Indonesia’s oil minister, stunned observers by saying that the cartel would be unable to pump any more oil to alleviate the pressure on prices. “The oil price is very high, it’s crazy,” he said, adding that “there is no additional supply.”

However, he contradicted that statement the next day (most likely after coming under pressure from Saudi Arabia, the leading member of OPEC), claiming that the cartel has around 1m to 1.5m barrels per day (bpd) of spare capacity that it could tap immediately. This, combined with a surprise increase in American gasoline stocks and news that Russian bailiffs would allow Yukos access to its bank accounts to pay workers, helped bring the oil price down by around a dollar. But the price bounced back to a new high on Friday after hardliners in the Russian administration overruled the bailiffs. General scepticism about OPEC's ability to pump any more oil has also put upward pressure on the price.

Like the oil market, the money markets are fretting that the high price could hurt the world economy. Mr Yusgiantoro’s comments sparked a sell-off on America’s stockmarkets, which were already worrying about America’s flagging economic performance—GDP growth slowed to a lower-than-expected 3% in the second quarter, on an annual basis. Alan Greenspan, chairman of the Federal Reserve, has said the high oil price is partly to blame for weakening consumer spending, which fell by 0.7% in June. Dresdner Kleinwort Wasserstein, an investment bank, reckons that half a percentage point could be knocked off American growth in 2006, and 0.7 added to the inflation rate, if oil remains above $40 a barrel.

OPEC’s power has been on the wane since the oil crises of the 1970s, when the cartel was able to triple prices almost overnight by restricting supply to western consumers. Since then, industrialised economies have reduced their dependence on oil, but it is still a crucial commodity, and OPEC still accounts for around 40% of world oil production. Moreover, Saudi Arabia alone accounts for a quarter of the world’s proven oil reserves. It has been able to influence prices simply by turning its taps on and off.

Until recently it was OPEC’s ability to turn the taps off that was in doubt. Members tended to exceed the production quotas set at the cartel’s regular meetings, in the hope that other members, especially Saudi Arabia, would keep to their limits, and thus support the price. The incentive to cheat grew even stronger as non-OPEC suppliers, especially Russia, grew in importance. (Russia’s output has increased by 2m bpd every year for the past three years.) OPEC’s current production of around 30m bpd (including Iraq) is well above its official quota of 26m bpd.

But now it is OPEC’s ability to open the taps further that is in doubt—and at a time when the antics of Russian prosecutors are also raising questions about supply from that country. OPEC’s spare capacity is now thought to be 1-2% of global demand, well under the 4% that is thought necessary in order to influence prices. That gap cannot be closed quickly, since the oil-production business has long lead times and any new oil will take a couple of years at least to come on stream. In his comments on Tuesday, Mr Yusgiantoro hinted that that went for Saudi Arabia as well as the rest of OPEC.

Saudi production in July was 9.25m bpd, well above its 8.45m quota, but below its 10.5m official capacity. Following Mr Yusgiantoro’s comments, Saudi officials insisted they could indeed raise output quickly. Saudi Arabia claims that it has opened two new production plants, at Abu Safah and Qatif, three months ahead of schedule. While these are meant to replace production from older facilities, not to add new output, it is understood that the Saudis are now planning to delay the retirement of older fields in order to help ease the oil price.

In addition to OPEC’s attempts to increase supply, the International Energy Agency also expects non-members to boost output by a combined 1.2m bpd over the coming year, of which around half will be from the former Soviet Union. But that figure is hostage to events in Russia. At 1.7m bpd (more than is pumped from all of Libya’s wells), Yukos’s output makes up 2% of global oil production and thus has a noticeable effect on the price. With Russian officials now attempting to sell the company’s prize subsidiary, Yukanskneftegaz, oil traders are likely to remain jittery.

Another factor adding to nerves in the market is the alert about more attacks from al-Qaeda, issued by America’s homeland-security chief last week. This came as a stark reminder of the dangers facing America (the world’s largest oil consumer) and the instability in the Middle East (home of much of the world’s oil reserves). With this uncertainty likely to continue, OPEC likely to keep brushing up against its capacity limits, and Yukos certain to remain under fire, the world may just have to get used to oil of $40 or more a barrel.

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One have to admit that GWB's plan to have cheap oil forever, enabling our environmentally friends the North Americans to drive their SUVs cheaply forever was a good plan. It was just poorly executed.

Now, with Iraq's production in shambles we have to live in a 44$/barrel world. Inflation increasing worldwide because of lack of oil supply.

What's in it for China?

Electricity shortages combined with high oil prices and a white hot economy might mean:
-GDP growing slower (leading to less job creation)
-Increase in inflation (leading to decrease purchasing power and hence in quality of life)
-Current account deficits (pressure in the RMB, and further inflation increase as crucial industrial imports get more expensive)
-Pressure in the rmb
-Decrease in export competitiveness: high energy prices and imported raw materials would offset labour cost advantages. This would further harm the trade balance....

Doesn't look good does it? It's easy to blame GWB. But think about this:
-There were no WMDs in Iraq
-Iraq had NOTHING to do with 911
-Handover to Iraqis has been poorly executed: terrorism
-A lot of oil contracts where not tendered for (i.e. Dick Cheney's friends made a fortune out of the taxpayer)

We could go on and say that GWB's election was a fraud too. But that we don't have how to prove.

It's a sick world isn't it?

Let's see if he gets re-elected. I bet he will.

Goosie

Board Grand Dame

Joined: July 16, 2003
Posts: 4776
Location: Singapore
Status: Offline

Posted: Aug 09, 2004 - 10:28 PM

HC, I won't get into the politics of this, but your points about the effect of expensive oil on China are spot on. Great analysis. China's economy is white-hot, as you put it, but also fragile and subject to lots of external risk, including high petroleum costs.

Do you hold out much hope that the Russians will be able to fill much of the void? I understand there are huge untapped reserves in Siberia. Seems to me that China could benefit the most from exploitation of those reserves, especially given the obvious logistics. What do you think? I read about Siberian oil months ago, but have seen little since. I'm aware of the scandal with the oil giant in Russia (name of the company escapes me as I write this) and wonder if that is standing in the way of production.

Henry_Chinaski
Board Lord

Joined: Aug 16, 2003
Posts: 5025

Posted: Aug 09, 2004 - 11:12 PM

Tks boss.
The name of the company is Yukos. A bloody mess with politics, corruption and tax evasion is going on (probably some sex and heroin addicts are somewhere in the plot too).
Problem of oil in Siberia is that it is seasonal. You can't pump most of it during the winter, so, it solves part of the problem. Iraq is the only way to break the Saudi's backs i.e. GWB's plan was brilliant, but it was poorly executed. Who would want to invest in Russia when you can just invade Iraq?

And then of course we have the Caspian see. A shitload of oil there as well. But who wants to go there anyway.

Oil from Russia to China is a loooong soap opera not likely to finish any time soon. And then of course we have to put North Korean into the equation. It's actually so complex it's fascinating.

For anyone interested in the oil industry please check BP's website and try to download their yearly review of the oil industry. It's a little magic Excel spreadsheet that contains among others who buys what from whom, who has reserves and for how long, which country is increasing consumption, who is running out of reserves in 10 years, and the likes...Anyone that claims to understand world politics should be familiar with it...