Oil's record price rise in 2007-2008 rivals price increases during the two previous oil shocks, in 1973-74 and 1979-80. Moreover, while we'll leave for sector analysts and economists to declare if oil's 100% gain in 2008 and 400% gain since 2000 qualifies for an oil shock, those analysts and economists generally agree that the price rise has been driven by rising demand, particularly increased demand for oil in emerging markets, such as China and India.
However, that's not to say that the weak dollar and speculators / institutional investors have not affected the price of oil to the upside: they have, economists generally agree. Further, most analysts also believe oil's price contains a 'geopolitical / civil unrest risk' premium, as well. But all of the aforementioned does not blot-out the primary driver: the fact that about 1 billion new consumers of oil in emerging markets (in the form of car owners, factories, and commercial trucks) are being incorporated into the industrialized world, as the initial decade of globalization progresses.
Given the demand characteristics, and ignoring. for the moment, conservation / efficiency issues and alternative energy sources, a natural question concerns supply. Are there any nations that could increase supply by large amounts? Indeed there are three, but the answer is not as simple as 1-2-3.
The 3 major oil reserve nations
- Iraq – The possessor of the third largest proved reserves (115 billion barrels), Iraq's oil production has been depressed by the Iraq War, and delays in massive required repairs to its infrastructure. By extension, a sustained increase in production assumes a cessation of hostilities and a political solution, and these are not on the immediate horizon. But the point here is that Iraq is capable of producing 6, 7, even 8 million barrels of oil per day, given investment and a stable government. Iraq's current output is about 2.5 million barrels per day, according to the Middle East Economic Survey.
- Iran - The Persian nation boasts the second largest proved reserves (136 billion barrels) - - another potential source of increased supply in the near future. However, decades of underinvestment and a lack of domestic technology have hindered oil production, currently about 3.8 million barrels per day, according to MEES. Iran is also involved in a nuclear energy dispute with the west: the United States and the European Union, among others, say Iran is seeking nuclear technology to build a bomb; Iran says it's seeking it for electric power, only. Given appropriate investment, and assuming political issues can be resolved, Iran could produce 6-8 million barrels per day.
- Saudi Arabia – The holder of the largest proved reserves (260 billion barrels), Saudi Arabia also possesses the largest immediate, spare capacity in the world, estimated at 1-3 million barrels per day. (Some place the spare capacity as high as 5 million barrels per day.) With the Saudi's announcement in June of a production increase, the kingdom will produce about 9.4 million barrels per day.
Oil Analysis: As the above data indicates, given the right investment and geopolitical conditions, considerable spare capacity exists regarding oil. Iran looks like the nation least likely to increase supply, near-term, given the seriousness of the political issues between it and the west. Iraq is a major unknown, until the Iraq War's outcome and impact is known. Saudi Arabia appears to be the most likely source of substantial new supply of the three nations.
Can increased global supply lower oil prices? Without a reduction in demand growth, probably not, but it can mitigate increases, and buy oil consuming nations more time to increase efficiency, switch to substitutes, and ultimately, transition away from oil.
Cramer on BloggingStocks: The SEC's waffling will be deadly
How Fannie and Freddie will fail
Before the bell: Stocks may rebound; HPQ, FRE, EBAY, AAPL, AUY, F
Reader Comments (Page 1 of 1)
6-26-2008 @ 12:45PM
goodweb55 said...
Contrary to what US Energy Secretary Samuel Bodman says I don't think supply and demand are really causing the problem. There are to many other factors at play here. Too many middle men skimming profits. Too much manipulation of supplies and inventories. The price of oil nearly doubled and gas went up a third in just one year and yet figures are coming out that indicate we are using less gas, not more, probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices. Speculation is driving prices !!! Lawmakers blame loopholes in commodities trading like the Swaps loophole or Enron Loophole. Whatever you want to call it, It's a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders and I am sick of the smoke and mirrors. The meeting in Saudi Arabia hasn't achieved any substantial results from what I can see. The price of oil is still going up. There must be something else that's driving prices up and I think I know what it is. Although il appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the worldwide recession. This will result in lower gas consumption and it will free up more gas supplies.. I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil. We may be looking at another ENRON. Hedge funds will topple leaving old age pensioners with nothing. The government won't be able to bail them out this time because the cost would be far to great. The CFTC and ICE will be too slow to react to the cracks forming in commodities trading so the govenment will finally step in. By that time it will probably be too late. www.nbtv.ca
6-26-2008 @ 1:10PM
Kent said...
You couldn't have made a better case than you did, Goodweb. I fully agree. I also would like to interject that the Morgan Stanley's and the Lehman's of the investment industry are covering their losses from the sub-prime fiasco through this oil medium. But, ultimately someone is going to be left holding the bag when the oil market tanks. Congress will react but as you say, it'll be too late by then.