Situations To Watch
By Tom Whipple
Evidence is mounting that oil prices will soon climb to new, perhaps unaffordable for many, highs. Some think “soon” is three, four, or five years away. Others think “soon” may be as close as three, four, five, or six months. It is this latter scenario in which oil and gasoline prices reach new highs before the year is out that we look at today.
Everyone, of course, understands that at anytime a bolt from the blue could seriously curtail world oil supplies and run prices to unimagined highs in a matter of days or weeks. Such an impossible-to-anticipate event might be an assassination, a coup, a new war, a terrorist strike or even a well-placed storm.
There are, however, on-going situations which alone or in combinations could push oil prices to new highs in an easily observable and anticipatable manner.
The most obvious situation is the state of US crude and products stockpiles. Although they are currently considered “ample,” total US stockpiles have been dropping since February indicating that we are burning more than we are pumping and importing. Increased US production is largely out of the question. US oil peaked 35 years ago and talk of new deep water discoveries will be nothing but talk for at least the next five or six years.
Thus the issue becomes why imports have been dropping. Some hold that US importers are cutting back during the spring maintenance season when oil refineries traditionally undergo cleaning and overhaul. Others, looking at the drops in crude production by the US’s traditional suppliers such as Mexico, Saudi Arabia, Nigeria, and Venezuela, are starting to wonder if importers can really find all the crude they want to import. Keep in mind that one of these days the US will be bidding for available supplies against the well-heeled such as China, Japan, and Europe.
The next problem clearly coming onto the radar screens is the Nigerian elections in April. Without going into a long story, it is looking as if the Nigerian electoral process is more likely to initiate yet another civil war than to successfully pass power from one president to another. Oil production is already down about 600,000 barrels a day due to insurgent attacks and more are promised if the elections turn into a fiasco. Many scenarios are possible ranging from a near-total cutoff of Nigeria’s on-shore oil production to US intervention. Watch this one closely.
The 64 billion barrel question, however, is the state of the Saudi oil fields. Many hold, and with good reason, that when Saudi Arabia goes into depletion, the oil age is on the way out. During the last six months Saudi production has dropped from 9.5 million to 8.5 million barrels a day. Now there are several possible reasons for this drop ranging from not being able to find buyers for their heavy, sulfur-laden oil at today’s prices, through a desire to force up prices by cutting supplies, to the key issue which is that the Saudis simply can’t find and open new production fast enough to keep ahead of depletion in their aging fields. If this is the case then 2007 will be a seminal year.
Although the Saudis proclaim that all is well and their “capacity to produce oil” will soon reach new heights, it is likely that before the year is out we should have a better insight into the kingdom’s future as an oil producer.
If Saudi production continues to drop during 2007, suspicions of trouble in the kingdom’s oil fields will increase to a feverish pitch— as of course will oil prices. If prices increase significantly this summer and the Saudi’s don’t respond with significantly higher production, then many will hold that, at least temporarily, the Saudis can not increase production.
A sleeper issue due to come to a head this spring is the nature of the participation by western oil companies in production of synthetic crude from Venezuela’s Orinoco heavy oil sands. A few weeks back, President Chavez decreed the six western oil companies must turn over 60 percent interests and control of the Orinoco projects to the government’s oil company. Negotiations are now going to determine the terms under which the Western oil companies will remain involved in the projects in which they have already invested $30 billion.
The next few weeks should tell whether the oil companies are willing to stay in the Orinoco helping the Venezuelans make synthetic crude, using the oil companies proprietary technology, for much less profit, or simply walk away seeking to recover their investment in the courts. At stake is about 500,000 barrels a day of synthetic crude production which the Venezuelans may or may not be able to keep running by themselves.
Keep an eye on the hurricane season. The El Nino hot spot in the Pacific, which many believe suppressed the 2006 hurricanes in the Gulf, has cooled off. Surface temperatures are already above normal so the ingredients are in place for an active 2007 hurricane season.
Keep the other eye on what the Mexicans are telling us about production from their giant Cantarell oil field, most of which has been coming to the US. Should production really tank in 2007, some believe that the US will have difficulty finding enough oil on the world market to import.
Iraqi oil production continues to bubble along with exports running about 1.5 million barrels a day. Stealing oil and revenue in Iraq is obviously so profitable to the various insurgent groups that nobody wants to blow up the gravy train until they have to. If the recently announced US crackdown on oil stealing is successful, we might see more oil infrastructure blowing up and exports going down.
As a closing thought, keep your remaining eye on the dollar. Some believe there is enough financial turmoil just ahead to limit our ability to import oil.