08/22/2002
Oil Update
Every few months it’s worth updating the world oil scene, particularly as war with major producer Iraq seems inevitable. Following are some pertinent current facts.
--The U.S. consumes up to 20 million barrels per day (hereafter, ‘mmbd’) of the world’s total consumption of 76 mmbd. The International Energy Agency is forecasting a slight increase to 77 mmbd in 2003, based on lower prices than today and moderate economic growth worldwide.
--The U.S. has only 3% of the world’s known reserves of oil, compared with 60-65% in the Persian Gulf. Saudi Arabia, alone, sits on top of 25% of the world’s proven reserves.
--Knowing this, it is hard to escape the fact that the United States will continue to import a large portion of its crude, currently to the tune of 12 mmbd, until our nation develops more alternative sources of fuel, and/or takes advantage of known reserves such as the Arctic National Wildlife Refuge.
--Under existing policy, the U.S. could be importing 15 mmbd within 10 years.
--Oil expert Daniel Yergin: “The first principle of energy security is diversification.” [Patrick Tyler / NY Times]
--Of the world’s 76 mmbd consumption, OPEC currently produces about 30% (or, put another way, its market share is 30%). This is for the “OPEC 10.” When you include OPEC member Iraq, OPEC’s share is closer to 33%.
--OPEC (ex-Iraq), currently has production quotas in place of 21.7 mmbd, but it has been producing in the neighborhood of 22.8 – 23.5, i.e., it’s been cheating on its quotas, a fact that the high prices of today, in the $29 range, encourage. This also means, however, that non-OPEC is increasing, a worrisome thought for OPEC ministers.
--Despite the above, Saudi Arabia remains the “Central Bank” of the oil market, because it can provide liquidity in tough times, or take away the spigot. Today, Saudi Arabia is producing at a rate of about 7.4 mmbd. Just over a year ago, though, it was closer to 8.7 mmbd. Saudi Arabia has over 3 mmbd excess production capacity, which represents its leverage over the world community. The only other OPEC nations with excess capacity are Kuwait, UAE and Venezuela, but regarding the latter, I’d say this is highly suspect, since Venezuela’s energy infrastructure is decaying by the day and there is zero money in the national coffers to pay for new plant and equipment.
--Saudi Arabia supplies the U.S. with 14% of its imports, 1.7 mmbd.
--The U.S. was importing up to 1 mmbd from Iraq (which has the second largest oil reserves in the world behind S.A.), but U.S. oil companies are dropping out because Baghdad has been demanding kickbacks, to the tune of 20-50 cents per barrel, plus the U.N. is cracking down on how oil consumers purchase Iraqi crude. Last year, Iraq represented about 8% of U.S. imports. Today, the U.S. imports only 100,000-200,000 barrels from Iraq.
--Many in the U.S. can’t understand why we need to import anything from Iraq. [I’m not taking sides in this debate for the purposes of this article.] One reason is that the U.S. was participating in Iraq’s oil-for-food program, proceeds of which were to buy food and medicine, as well as pay for the rebuilding of Iraq’s infrastructure.
--Baghdad has been abusing U.N. sanctions and restrictions to the tune of $1.8 billion a year.
--When looking at world consumption and the role of the global economy, keep in mind that while the U.S. may consume 20 mmbd, Asia’s figure is about 21 mmbd.
--The U.S. has a Strategic Petroleum Reserve that currently has in excess of 580 mm barrels. Day by day the government is increasing it, with an eventual goal of filling it to its current capacity, 700 mm barrels. One way to look at this latter figure is to divide it by the 12 mm barrels we import each day and you come up with a figure of roughly 60 days worth of supply. In other words, if there was a massive disruption in world oil supplies and the U.S. didn’t receive a drop, even from our friends, the reserve could take care of our normal needs for two months. That’s obviously an extreme example, but it does show the importance of it. However what most folks writing articles on the Strategic Petroleum Reserve fail to take into consideration is the fact that, technically, the U.S. can only draw out a maximum of 4 mmbd just due to the logistics of the reserve. So now you have a different situation. If all the OPEC gulf states shut us off (not likely, but still a threat), the reserves would not be sufficient to make up the difference. The issue would then be could we go elsewhere?
--Russia is one possibility, but even though this nation is now producing at a rate equal to Saudi Arabia, it is at full capacity and may not be able to help us much until the country modernizes its production facilities. Down the road, however, Russia will be an increasingly critical energy ally.
--The # of miles driven per vehicle is up 20% since 1973 and the # of vehicles on the road in America is up 50% since 1970. The average miles per gallon was 11.9 in ’73 and is only 16.9 today (basically unchanged in the last ten years).
--Those looking ahead to winter should know that the U.S. consumes ’s of the developed world’s heating oil. Start chopping wood.
Sources:
Colum Lynch / Washington Post Reuters Wall Street Journal David Buchan / Financial Times J. Robinson West / Washington Post Patrick Tyler / New York Times Richard Stevenson / New York Times Stanley Reed / Business Week Alex Lawler / Bloomberg Toby Shelley / Financial Times
Brian Trumbore
Next Hott Spotts September 5.
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