[A-List] OIL: High Prices Fail to Bolster Output

["Yoshie Furuhashi" <critical.montages@xxxxxxxxx>]

Have I mentioned that the helpful mullahs of Iran want to build
nuclear power plants and invest more into oil and gas, as well as wind
and solar, so they can export more fossil fuels?  Perhaps God told
them to help ease the energy supply crunch and do their share to save
global capitalism.  But strangely the guardians of the empire have so
far spurned the mullahs' generous offer. -- Yoshie

High Prices Fail to Bolster Output:
<http://www.nytimes.com/imagepages/2008/04/29/business/20080429_OIL_GRAPHIC.html>

<http://www.nytimes.com/2008/04/29/business/worldbusiness/29oil.html>
April 29, 2008
Oil Price Rise Fails to Open Tap
By JAD MOUAWAD

As oil prices soared to record levels in recent years, basic economics
suggested that consumption would fall and supplies would rise as
producers drilled for more oil.

But as prices flirt with $120 a barrel, many energy experts are
becoming worried that neither seems to be happening. Higher prices
have done little to suppress global demand or attract new production,
and the resulting mismatch has sent oil prices ever higher.

That has translated into more pain at the pump, with gasoline setting
a fresh record of $3.60 a gallon nationwide on Monday. Experts expect
prices above $4 a gallon this summer, and one analyst recently
predicted that gasoline could reach $7 in the next four years.

A central reason that oil supplies are not rising much is that major
producers outside the OPEC cartel, like Russia, Mexico and Norway, are
showing troubling signs of sluggishness. Unlike OPEC, whose explicit
goal is to regulate the supply of oil to keep prices up, these
countries are the free traders of the oil market, with every incentive
to produce flat-out at a time of high prices.

But for a variety of reasons, including sharply higher drilling costs
and a rise of nationalistic policies that restrict foreign investment,
these countries are failing to increase their output. They seem stuck
at about 50 million barrels of oil a day, or 60 percent of the world's
oil supplies, with few prospects for growth.

"According to normal economic theory, and the history of oil, rising
prices have two major effects," said Fatih Birol, the chief economist
at the International Energy Agency in Paris. "They reduce demand and
they induce oil supplies. Not this time."

With global supplies tight, geopolitics continue to play a big role in
pushing up oil prices. Oil futures closed at $118.75 a barrel, up 23
cents, on the New York Mercantile Exchange, after strikes by oil
workers in Scotland and Nigeria that shut down nearly 1.7 percent of
the world's daily production.

Countries outside the Organization of the Petroleum Exporting
Countries have been the main source of production growth in the past
three decades, as new fields were discovered in Alaska, the North Sea
and the Caspian region.

But analysts at Barclays Capital said last week that non-OPEC supplies
were "seemingly dead in the water." Goldman Sachs raised similar
concerns last month, saying that growth in non-OPEC supplies "can no
longer be taken for granted."

At the same time, oil consumption keeps expanding. Global consumption
is forecast to increase by 1.2 million barrels a day this year, to
87.2 million barrels a day, with much of the growth in demand coming
from China, India and the Middle East, according to the International
Energy Agency, a group that advises industrialized countries.

In the United States and through much of the developed world, the
higher fuel prices have led drivers to reduce their consumption, and
gasoline demand is expected to drop this year. But that drop will be
more than offset by the rise in energy demand from developing
countries. In the next two decades, demand is projected to jump by 35
percent, and developing countries will consume more oil than
industrialized countries.

Higher oil prices mean record profits for oil companies that have, to
some extent, masked the supply problems. Exxon Mobil and Chevron are
both expected to deliver knockout performances when reporting
quarterly earnings this week, even as they struggle to increase
production.

"What is disturbing here is that things seem to get worse, not
better," said David Greely, an analyst at Goldman Sachs. "These high
prices are not attracting meaningful new supplies."

The outlook for oil supplies "signals a period of unprecedented
scarcity," Jeff Rubin, an analyst at CIBC World Markets, said last
week. Oil prices might exceed $200 a barrel by 2012, he said, a level
that would very likely mean $7-a-gallon gasoline in the United States.

Some regions are simply running out of reserves. Norway's production
has slumped by 25 percent since its peak in 2001, and in Britain,
output has dropped 43 percent in eight years. Production from the
giant Prudhoe Bay field in Alaska has dropped by 65 percent from its
peak two decades ago.

In many other places, the problems are not below ground, as energy
executives like to put it, but above ground. Higher petroleum taxes
and more costly licensing agreements, a scarcity of workers and
swelling costs, as well as political wrangling and violence, are
making it harder to raise production.

"It's a crunch," said J. Robinson West, chairman of PFC Energy, an
energy consulting firm in Washington. "The world is not running out of
oil, but rather it's running out of oil production capacity."

Mexico, the second-biggest exporter to the United States, seems
increasingly helpless to find new supplies to offset the collapse of
its largest oil field, Cantarell. A combination of falling production
and rising domestic consumption could wipe out Mexico's exports within
five years.

Foreign investment could help Mexico produce oil from deeper waters,
but that is a controversial proposition in a country where oil has
long been seen as part of the national patrimony.

Another country, Russia, is also a focus of analysts' worries. Russia
is not exactly running out of places to look for oil — a huge chunk of
eastern Siberia remains unexplored — and the country has been the
biggest contributor to the growth in energy supplies in the last
decade.

But Russian energy officials warned recently that the days of stunning
growth that followed the collapse of the Soviet Union were over, as
the country focuses on stabilizing its output. Russia today produces
about 10 million barrels of oil a day, up from a low of 6 million
barrels in 1996.

The Russian government has been muscling Western companies to gain
more control over its energy resources. That rise in energy
nationalism could freeze new investment and slow any meaningful growth
in supplies there for years.

As countries like Russia slow output, analysts say OPEC will have to
pick up the slack. The oil cartel accounts for 40 percent of the
world's oil exports and owns more than 75 percent of global reserves.
But there are serious concerns that OPEC will also find it tough to
increase production.

Saudi Arabia, the world's top oil exporter, is completing a $50
billion plan to increase capacity to 12.5 million barrels a day, but
it signaled recently that it would not go beyond that. That means
Saudi Arabia could fall short of the 15 million barrels a day that
most experts had expected it to produce in the long run.

OPEC's 13 members plan to spend $150 billion to expand their capacity
by five million barrels a day by 2012. But OPEC will need to pump 60
million barrels a day by 2030, up from around 36 million barrels a day
today, to meet the projected growth in demand. Analysts say that
without Iran and Iraq — where nearly 30 years of wars and sanctions
have crippled oil production — reaching that level will be impossible.

Not everyone is pessimistic about energy supplies. A study by the
National Petroleum Council, an industry group that provides advice to
the secretary of energy, concluded that the world still had plenty of
petroleum resources that could be tapped.

In fact, high prices have set off a global dash for oil. Brazil, for
example, has struck large offshore fields that could turn the country
into one of the world's top 10 producers. But developing new fields
can take many years.

To make up the shortfall, the world is also increasingly turning to
fuels from unconventional sources, like biofuels or heavy oil.
Canadian tar sands, for example, have attracted large investments.

But the International Energy Agency estimates that current investments
will be insufficient to replace declining oil production. The energy
agency said it would take $5.4 trillion by 2030 to raise global
output. Otherwise, it warned that a crisis before 2015 involving "an
abrupt run-up in prices" could not be ruled out.
-- 
Yoshie
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