Saturday Oil Report -- June 23, 2012

Oil prices have plummeted since the previous report, signaling that markets have overshot to the downside.

Price graphs from oil-price.net

I'm lowering the alarm level again.

Oil Alarm Level — Green

Although we have clear sailing with respect to the price of oil, the global economy is unraveling. That's definitely a problem. Allow me to state the obvious—you can not have both a booming global economy and low oil prices at the same time.

As oil prices decline, the idiots have come out en masse to explain it. Here's an MSNBC story I found this morning, but there are many other similar stories. It seems that we're swimming in oil.

The world is now pumping 91.1 million barrels per day, the most ever. OPEC production, at more than 31.5 million barrels in May, is also higher than normal.

No, sorry. The world is pumping 73-74 million barrels-per-day of crude oil, just as it has since 2005. (Probably a little over 74 right now.) Moonshine (ethanol) is not crude oil. Natural gas liquids are not crude oil.

Are you ready? ... are you set? ... wait for it ... here it comes!

IHS CERA Chairman Daniel Yergin, speaking from the St. Petersburg International Economic Forum, said the high production level made sense just several months ago, when speculation around Iran reaction to sanctions sent prices higher.

“It was a quite remarkable period when you go back four months ago. Oil prices got as high as $128 and people were talking about $160, and now it’s at $90,” he said.

[My note: Yes, he really said this inane shit. That's how he talks.]

“It shows three things: the relentless increase in supply, particularly led by the Saudis, who have been producing very steadily at high volumes since last year and the beginning of this year. Secondly, it reflects the growth of oil from countries as diverse as Iraq and the United States,” said Yergin.

“The supply situation is very different than it was three months ago when Iran was threatening to close the Strait of Hormuz, and the other thing is the bad economic news and weak demand,” he added.

While supply is indeed up a bit because OPEC has chosen to pump more crude oil and thus reduce the world's effective spare capacity, the main driver behind lower oil prices is declining demand. But this sycophantic son-of-a-bitch Daniel Yergin always wants to tell us that we're drowning in oil, or soon will be, and MSNBC is naive enough to quote him. For fools and whores in the mainstream media, Danny-boy is always the expert of choice.

Normally I wouldn't bother with Yergin, but let's look briefly at Iraq. He cites them as a source of "the growth of oil" along with the United States. In short, we want to answer the question—

Was the Iraq War a success?

The New York Times (who else?) gives us some insights in Oil Output Soars as Iraq Retools, Easing Shaky Markets (June 2, 2012).

BAGHDAD — Despite sectarian bombings and political gridlock, Iraq's crude oil production is soaring, providing a singular bright spot for the nation’s future and relief for global oil markets as the West tightens sanctions on Iranian exports.

The increased flow and vital port improvements have produced a 20 percent jump in exports this year to nearly 2.5 million barrels of oil a day, making Iraq one of the premier producers in OPEC for the first time in decades.

The recovery of Iraq’s oil industry after decades of wars, sanctions and neglect began in 2009 and 2010 as security improved and Baghdad signed a series of technical service contracts with foreign companies like Exxon Mobil, BP, China National Petroleum Corporation and ENI of Italy. The companies brought in modern seismic equipment and modern well recovery techniques to resuscitate old fields.

The deals have been only modestly profitable for the foreign companies, but foreign executives express cautious optimism that Iraq can eventually produce oil in amounts that could put it in an elite group of exporters with Saudi Arabia and Russia sometime in the 2020s.

Iraq produces around three million barrels a day, and few analysts believe it can reach its goal of 10 million barrels a day by 2017, a target Baghdad recently reduced from a previous estimate of 12 million barrels a day by that year. But Hans Nijkamp, Royal Dutch Shell’s Iraq country chairman, estimates that Iraq could produce 6 million to 10 million barrels a day by early next decade, “which is really substantial.”

If oil production is about 3 million barrels-per-day, and exports stand at about two and a half, I wouldn't call that soaring. But production in Iraq is rising as new oil comes on-stream and infrastructure is refurbished, and most of that crude oil is available for export because the country lies in ruins after the American invasion and 8 years of war. So was the war a success?

I'm afraid you're going to have to wait another decade to find out. Hans Nijkamp of Royal Dutch Shell believes Iraq could be producing 6 million barrels-per-day by the early 2020s. (Forget the 10 million.) That could happen, but only if every single thing that can go right does go right. This is the opposite of Murphy's Law. Because of the turmoil in Iraq over the last 30 years, they have the world's only remaining easily exploitable reserves, and those reserves are substantial.

A reader asked me last week if I would raise the oil alarm level if prices fall sufficiently to threaten some sources of supply. Yes, I would. For example, each barrel of North Dakota Bakken Shale oil costs somewhere between 55 and 70 dollars to produce. If prices fall into that range, or even below that, that Bakken oil will be endangered. One virtue of Iraq's oil is its low producer price.

Where will oil prices be in two weeks? Perhaps they will fall further? Yes, that's possible. We shall see.

Comments

[KLR]

Fun fact: Transparency International, a Berlin-based activist group, ranked Iraq 175th out of 182 countries in its corruption-perceptions index last year. Iraq's oil riches finally being tapped | StarTribune.com Lots of oil being smuggled out of the country, ala Texas 1933, of all places.

The "soaring" "rapid expansion" (fudge words courtesy BusinessWeek) is courtesy of new pipelines and port infrastructure. It's about as significant as those intervals in the GOM where production completely shuts down for hurricanes. Their all-time sustained record was 3.48
mb/d in 1979, let's see them reach that on a sustained basis, after 30 years of pumping fuel oil into reservoirs.

[adam]

Nice summary. It's undeniable how strongly linked oil and the economy are, no matter what Yergin says. With Europe in deep trouble (though they seem to be able to stretch out the crisis indefinitely without everything falling apart, somehow) and China also slowing down, the drop in prices was inevitable.

And conversely, with a rise to $128, a drop in demand was inevitable.

That said, I was somewhat surprised by how it played out - rather than a big spike and crash like last time, it just floated up to $128 and then started drifting down. I wonder why it is so much less extreme than last time - of course, the economy never got back to where it was, but then why did it keep rising in the first place? Perhaps this is a new pattern. I was expecting a spike but now I can see that was naive of me.

I'm starting to think watching natural gas and coal is getting important - there are a few gas-to-liquids plants planned, and I think it may play out as a painful but hilarious series of peaks as everything is consumed to keep up the liquid fuel game. Peak oil in the strict sense may just be the leading indicator of collapse, with peak liquids being the true danger.

[Jack Leonard]

Hi Dave, thanks for that analysis, I would have thought that the cost of Bakken crude was well north of $70? I'm sure that oil cannot be produced in Alberta's tar sands for anything under $80 no matter what the industry flaks say.

[Wanooski]

When I look at flaks like Yergin, I have to wonder, are they liars? Or are they idiots? Or is it some combination of the two?

[T E Cho]

@wanooski

This came out today but would be a good link for Fridays blog.

http://www.salon.com/2012/06/23/bernanke_bails_out_europe/

It shows how things are becoming more intertwined. I respect Wanooski's opinion about a slow decline, but disagree that the future only has more slow, gradual declines coming...

[Fred James, geologist]

Time for a housecleaning! The high crude price has brought forth fast buck artists and dumb money which pollutes our industry; low price can wipe them out. Those of us who have good production at low costs and no debt will survive in a more honest and more economic environment.

[david]

Hey Dave just wanted to thank you for the information, and analysis.

david