Saturday Oil Report -- December 3, 2011

Crude prices have been rising lately, with Nymex WTI standing at $100.96 and Brent at $110.35. As usual, it is hard to get a good snapshot of the global supply and demand picture, so it is equally hard to know how much the fundamentals are influencing rising prices, and how much they are being influenced by financial considerations. Dollar strength is relatively high at the moment, which should drive oil prices down, but it's been falling over the last few weeks, which drives prices up. It's hard to say what's going on.

The alarm level is the same as it was in my previous report.

Oil Alarm Level — Orange

If we see another $10-15 dollar rise in prices, I will escalate the alarm level. We will go into the Red in part because there was some Good News from Libya this past week. On Tuesday their production reached 840,000 barrels-per-day (b/d), which is about half their pre-revolution capacity.

Libya is now producing 840,000 barrels of oil a day, the country's National Oil Co. said Wednesday, surpassing its own most optimistic forecasts.

NOC said the level—which represents over half of Libya's pre-war production of 1.6 million barrels a day—had been reached Tuesday, following resumption at several fields in recent days.

NOC head Nuri Berruien had said earlier this month that production could reach as much as 800,000 barrels a day by year-end, following the end of the civil war and the toppling of Col. Moammar Gadhafi.

So things are improving in North Africa, which you might think would have a dampening effect on oil prices. But it hasn't, at least so far. Perhaps the global supply and demand balance is tightening even faster than I thought it was.

The Big Story making the rounds this week was a report out of Rice University's Baker Institute about China's future energy demand, including its future oil demand. Those at the Baker Institute, including Amy Myers Jaffe, have often taken mindless optimism to new heights, and this new report is no exception. Let's let Amy explain its implications.

A new study from the Baker Institute shows that Chinese oil consumption could easily mirror that of the United States by 2040, even with Beijing’s ambitious vehicle efficiency standards... China’s recent efforts at centralizing energy policy do not appear to be significantly more successful than the makeshift patchwork of energy initiatives devised by the United States. In fact, the study concludes, the U.S. system of open and competitive private sector investment is stimulating more innovation in the American energy sector than in the Chinese energy industry, especially in the area of unconventional oil and gas.

China, like the United States, has substantial potential shale gas resources but faces technical, regulatory and market infrastructure challenges that are likely to delay rapid development. Were China to mobilize investments in shale gas more quickly, the study said, it could greatly reduce the country’s expected large import needs for liquefied natural gas (LNG) from Australia and the Middle East and contribute to a future glut in global natural gas markets.

Despite sporadic government policies to discourage private car ownership, the growth in the number of vehicles on the road in China has more than quadrupled in recent years to more than 50 million. The Baker Institute report projects that this number could increase to more than 200 million vehicles by 2020 and 770 million by 2040 under a scenario where China’s real gross domestic product growth averages 6 percent between now and 2030.

That is a lot of cars to fuel. Even under a scenario where the number of electric cars rises to 5 million a year by 2030, which is in line with ambitious targets announced by China’s National Development and Reform Commission, China’s oil use from the transportation sector will grow significantly.

Yes, China's oil use to support the transportation sector will grow significantly right up to the moment when it can't grow any more. When a thing can't happen, it won't happen. And when it doesn't happen, everybody will fight for their "rightful share" of the oil supply. God help us, because we certainly can't help ourselves.

Where's all that fuel going to come from?  These clueless academics are projecting that China's oil consumption could mirror that of the United States by 2040, implying that their usage will be about 19 million barrels-per-day a mere 29 years from now. I wrote about this in my recent essay How To Think About The Future, from which I quote—

In short, do you find it plausible that the global economy will grow and grow for the next 39 years? If you think this is possible, or even likely, you should worry about CO₂ emissions from thawing permafrost. If you don't find [this scenario] plausible, and regular DOTE readers know I don't, you're likely to shrug off this Nature survey about future emissions from thawing permafrost, reasoning that there are plenty of things to worry about; this is only one of them.

For example, what will global oil production be in 2040? What will it be in 2050? In my view, it's not only likely, it's almost a certainty that global oil production will be considerably lower in 3 or 4 decades than it is right now. Perhaps you think that makes no difference to future economic growth. I beg to differ.

Now you can see, perhaps with new eyes, that scary scenarios about emissions from thawing permafrost (and the like) are predicated on what I call Dumb Extrapolation of 20th century economic growth trends well into the 21st century...

It is pleasing to see an excellent example of Dumb Extrapolation only a few days after I wrote about it.

What will oil prices be in two weeks? It's hard to say. The rule of thumb says the best prediction is often no change. Let's go with that.

Comments

[Iaato]

Thanks for this, Dave. Dumb extrapolation is right. Those who see climate change as the impending problem are failing to set the problem frame large enough around the problem, and are thus trying to solve the wrong problem.

Nothing goes on forever, because it can’t. It is the change that happens when it stops going on forever that will kill us, not the extrapolation of past bad FF habits. The four horsemen are classics for a reason. Ma Nature will sort us out as FF start to wane.

[Bill Hicks]

It seems to me that the financial shenanigans are a bigger factor in the rise in oil prices at the moment than actual demand pressure, especially with Libya coming back online. The longer this game of extend and pretend in propping up the financial markets goes on, the bigger and faster the next crash will likely be. What we can't know, of course, is exactly when that will happen.

[ugg Boots sale]

So things are improving in North Africa, which you might think would have a dampening effect on oil prices. But it hasn't, at least so far. Perhaps the global supply and demand balance is tightening even faster than I thought it was.