Current Events

Join us as we watch the crisis unfolding

January 19, 2007

Update, End of 2006

Happy New Year! It's time for an oil update. The groups that report 2006 oil production numbers explain that their estimates are subject to later revision. However, we need to know the implications right now. With that warning, away we go.

From April 2005 onward, crude oil prices have been above $50 per barrel. For several months during 2006, oil prices rose above $70. At those price levels, virtually all producers pumped every possible barrel. With that kind of cash flow, any well operator who suspected one morning that his Blakenship #7 well did not produce its usual share last night will have Halliburton out there in the afternoon trying to fix it.

Earlier, I estimated that the peak would be in December, 2005, but May will do. I'll take it. I'll take it.

The US Energy Information Agency publishes monthly estimates of world oil production at www.eia.doe.gov/ipm/t11d.xls. (Microsoft Office Excel Workbook) Of course, we hope that their estimates are not politically biased. Their current posting shows May 2005 as the month of greatest world oil production. Earlier, I estimated that the peak would be in December, 2005, but May will do. I'll take it. I'll take it.

If you open that EIA spreadsheet, read the first footnote. It says that the "other" column, which is one of their most successful categories, was obtained by subtracting the individually-listed countries from the world total. Wayminnit, how could they get the world total except by adding? This would be hilarious, except that they are doing it with my tax money.

World Oil Production Jan 2001 to Dec 2006
(Please click on the chart to view a larger version.)

Oil & Gas Journal publishes annual production estimates in late December each year, subject to revision a year later. The O&GJ preliminary estimate for 2006 is 72,486,500 barrels per day, compared to 72,361,600 in 2005. That extra 124,900 barrels per day isn't going to fuel all the new cars in Russia, China, and India.

O&GJ reports the percentage increase, or decrease, in production for each country. It isn't really exciting to read that Mozambique increased its 2006 oil production by 32 percent over 2005 because their total production was 200 barrels per day. We consumers want to subtract, not divide, 2006 from 2005. Here are the five biggest losers and the five biggest annual winners in barrels per day:

Losers

  • Norway -232,600
  • UK -198,000
  • Nigeria -186,700
  • Venezuela -142,800
  • Saudi Arabia -70,000

Winners

  • Russia +267,000
  • Azerbijan +181,700
  • Abu Dhabi +150,000
  • Angola +146,900
  • Canada +131,200

Saudi Arabia is of particular importance; it has been the swing producer for OPEC and for the world. The EIA report for the OPEC countries, including Saudi Arabia, is at www.eia.doe.gov/emeu/ipsr/t11a.xls. (Excel Workbook) According to the EIA, Saudi oil production has been creeping downwards since September 2005. Of course, the EIA and the O&GJ numbers may not be accurate, and the explanation is not clear. It could be that the decreased Saudi production is in support of the recent OPEC reduction to boost oil prices. Or, as Matthew Simmons claims in Twilight in the Desert, Saudi Aramco may be struggling to maintain their level of production. From a petroleum engineering point of view, reduced production rate is the best thing that could happen to the Saudi oilfields. It allows oil-water contacts to come back toward the horizontal.

Over the last few months, oil prices have dropped from $70 per barrel to $50. Most people learned in Econ 101 that a low price is a symptom of an abundance of supply. About five years ago Wired magazine tried to arrange a $1000 public wager between S. Fred Singer and me about oil prices on two consecutive years. It looked to me like a sucker bet. When supply and demand are closely matched, tiny changes cause enormous swings in price. We could have as well flipped a coin for $1000. I could, and did, arrange my own non-sucker bet by investing in several oil and natural gas stocks on a scale larger than $1000. It worked out quite well, thank you, although I have to grit my teeth during the downswings in price: Grit, grind, crunch.

As I was writing this, a statement from the Saudi Minister of Petroleum was reported by Forbes, the International Herald Tribune, and the Washington Post. He announced that Saudi Arabia will increase its oil production from 9 million barrels per day to 12.5 million barrels per day by the year 2009. I hope they succeed. Meanwhile, it keeps the other investors complacent while I buy some bargain oil stocks.

I enjoy talking with financial firms about the oil problem. It is gratifying that many in the financial community took an early interest in the consequences of a downturn in world oil production. One of the nicest compliments that I received was in Tokyo. A fellow told me that he read Hubbert's Peak five years ago, believed it, and told me that he "made a hell of a lot of money." I wasn't quick enough to ask how many zeros were in a "hell of a lot of money," but he heads the largest hedge fund in Asia.

I'm not in the business of recommending individual stocks. That requires far too much homework; I don't have the patience. Recognition is growing slowly that the world oil situation is approaching a crisis. But whenever the price of gasoline goes down, a lot of people think that the problem has disappeared.


 
 
© 2001—2011 - K. Deffeyes All Rights Reserved.
SD  site by Deffeyes Design