http://www.stratfor.com/MEAF/commentary/0009201050.htm

Tight Supply, Logistical Bottlenecks to Push Oil Prices Higher 1050 GMT, 000920

Summary

Rising energy consumption, stagnant production of crude oil, low reserves and capacity constraints along the supply chain will combine to keep crude prices at current high levels, $35 to $40 per barrel, at the very least until spring, even if Saudi Arabia increases production as much as possible and nothing disrupts the supply chain. Any disruption will immediately spike prices higher, and without any slack in the system they will be very slow to come off new highs. The world will soon have to accept $45 as the bottom-end price for a barrel of oil.

Analysis

Saudi Arabias Crown Prince Abdullah bin Abdel Aziz, the countrys heir apparent and de facto leader, stated on Sept. 18 that Saudi Arabia could increase oil production immediately to bring down oil prices. But any Saudi production increase could only keep pace with surging demand. The stage is set for a very tight oil market for at least the next year.

Of all of the worlds oil-producing states, only Saudi Arabia  currently producing 8.5 million barrels per day (bpd)  has any meaningful extra capacity. Kuwait, Indonesia, Iran and Nigeria cannot even meet the new quotas allotted to them at OPECs Sept. 10 meeting. Irans production actually dropped slightly last month. Algeria, Libya, Qatar and the United Arab Emirates, while meeting their new quotas, have now essentially maximized production, as has Iraq.

That leaves Venezuela. While insisting the country has spare capacity, Venezuelan Oil Minister Ali Rodriguez stated on Sept. 13 that OPECs total spare capacity was 2 million bpd  almost exactly the spare capacity for Saudi Arabia alone. Clearly, Saudi Arabia will have to pump most of the 820,000 extra barrels a day.

While this will still leave Saudi Arabia with approximately 2 million bpd of reserve capacity, that amount will be just enough to meet expected demand growth. Global oil consumption is increasing by roughly 1 million bpd a year. The Northern Hemisphere winter usually boosts consumption by at least another 1 million bpd, and so far that trend continues this year. Combine that with the fact that current consumption is already outpacing production, and it looks as if the production-consumption ratio will remain unchanged during the depths of the 2000-2001 winter  and thats assuming Saudi Arabia opens the taps all the way.

Normally, new fields would come on stream to alleviate any shortage of oil. But the 1998 oil crash deterred petroleum firms from new capital investments, and oilfields take years to develop. Many projects are underway  including deepwater wells off the west African coast and in the Gulf of Mexico, as well as new fields in Central Asia and the Russian Arctic  but only the Central Asian fields will start producing before 2002. And because of congested shipping lanes through the Bosporus, most of this oil will be trapped in the Black Sea, unable to reach world markets.

Production is not the only step in the supply chain under stress. Global stocks of crude oil are critically low  the U.S. reserve amounts to less than 60 days consumption. Stocks of refined products are even scarcer. American outrage at high gasoline prices this summer led refineries to favor fuel production over heating oil. Consequently, despite government attempts to establish a 2 million gallon heating oil reserve, stocks are still 20 percent lower than they were a year ago  and last year they were at a 10-year low.

Complicating matters, oil tanker transport rates have roughly doubled in the past two years, reflecting the scrapping of aging fleets. Tanker rates typically add another $1 to $2 per barrel to the cost of oil in major Western markets. The crude carrier market will remain very tight as the dismantling of old ships outpaces new supply over the next two years. This will push up transport rates and make oil markets even more susceptible to disruption.

Furthermore, use of global refining capacity is running close to flat-out. The United States, the largest refining nation, has been working its refineries at over 90 percent since 1995. Other states face similar shortages in refining capacity. As a result, even if a glut of crude oil suddenly appears on world markets, prices for refined products would stay high.

Unlike the shipping shortage, the refinery shortage will stay with us for years. It takes several years to add significant refinery capacity. The 1998 oil crash dissuaded investment in refineries as well as new fields. Most projects begun this year will not operate until 2002.

Compounding that transport crunch, most of the West relies on overseas refining for 10 to 25 percent of petroleum products. Any transport crisis will affect gasoline and heating oil as well as raw crude. And Saudi production increases will not relieve bottlenecks in shipping and refining. More Saudi crude now will not translate into cheaper gasoline later.

Rising consumption, stagnant production, low reserves and constrictions along the supply chain will combine to keep prices at current high levels at least until spring, even if nothing happens to disrupt any part of the system. Should logistical disruptions occur, prices will immediately spike  and without slack in the system, they will be very slow to come off any new highs.

Some examples of events that could trigger price rushes:

An oil spill in Nigeria took 130,000 bpd of production off line for 10 days in September. On September 14-16, a tropical storm threatened to temporarily stop production in the Gulf of Mexico, one of the United States most productive fields. Bombings in Colombia have repeatedly shut down the 230,000 bpd Cano Limon-Covenas pipeline. The Russian crude loading port at Novorossiysk closes for several weeks a year due to bad weather. Novorossiysk handles one-quarter of Russias oil exports. On September 14, Iraq accused Kuwait of slant-drilling across its borders into Iraqi fields. A similar accusation preceded Iraqs 1990 invasion of Kuwait. Iraq and Kuwait together produce 5.1 bpd. Just the possibility of renewed conflict boosted oil prices by 2 percent. Fuel protests in the United Kingdom in September threatened to disrupt North Sea oil production. The UKs North Sea fields produce most of the UKs 3 million bpd. Fuel protests in France in early September brought oil refining to a standstill, with 1.9 million bpd of refined goods unable to reach the market. Other fuel protests across Europe blockaded ports, denying access to millions of barrels of crude. This also served to tie up increasingly scarce tankers. A drought, combined with a desire for a more open political system, threatens Iran with instability that in turn could threaten onshore oil production. Iran produces 3.7 million bpd. Libyas oil infrastructure is in poor condition due to sanctions begun in 1993 that forbade imports of equipment that would assist the oil sector. Without new equipment, Libyan production (currently 1.3-1.4 million bpd) could decline. Russias oil infrastructure is also in poor shape due to a lack of capital investment. Leaks measured in tens of tons are commonplace, even on the larger export lines. Russian oil production is 5.9 million bpd.

With increases in supply unlikely, the only other way to bring prices down is to reduce demand sharply. The last four times that happened was through global recessions  and in three of those cases, high oil prices were a direct cause of those recessions.

The world will soon pump oil at maximum capacity. Once this happens, even minor disruptions will send immense shocks reverberating through the oil market, resulting in sharp and sustained increases in the prices of crude and refined products.

Troubles Ahead for Russias Oil Industry -14 September 2000

What Next for the Price of Oil? -6 September 2000

Oil, Power and Politics. Part I. Whos Afraid of the High Price of Oil? -30 August 2000

Oil, Politics and Power Part II: The Irony of High Prices -31 August 2000

Oil, Politics, and Power Part III: The Geopolitics of Expensive Oil -1 September 2000

From the Black Sea to Europe: The Next Contest for Energy Routes -29 August 2000

Washington Chases Oil -26 August 2000

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Country Information

-- Cynic (cpr@Idiots.RUs), September 23, 2000

Answers

what's with you people and oil? geez, give it a break already!

-- oilsmoyl (blabla@bla.com), September 23, 2000.

Oil is the elixr of life!!!

-- (hmm@hmm.hmm), September 23, 2000.

what's with you people and oil?

I'm old enough to remember what happened to the economy in the '70s and early '80s because of oil prices. Given the current record levels of consumer debt, the next recession (whenever that happens) could be a deep one.

IMF Says Economic Outlook Clouded by Energy Costs

http://greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=003qB7

-- Get (out@of.debt), September 23, 2000.

I just wish the oil producers of the world would get their acts together straight and produce on a pace according to need. Overproduction and old glut last year, underproduction and a tight market this year. They're playing politics with oil and we're trying to guess their games.

-- (smarty@wannabe.one), September 23, 2000.

I hate to even bring this up, because I personally think we're already using way more energy than we should be, but Venezuela has energy reserves approximately 1000 time greater than Saudi Arabia, only it's not in the form of oil. It's a bituminous procuct called "Orimulsion", which I assume is a contraction of "Orinoco" (from the Orinoco Belt, in the Orinoco River basin) and "emulsion".

JOJ

-- jumpoffjoe (jumpoff@echoweb.net), September 23, 2000.

Goblygettagoogoo from the Termelenous region of the Upper Switanginto River in the Lower Province of Aristulotous is famous for their clean and spiffy Gas/Convience Stores.

-- butt nugget (catsbutt@umailme.com), September 23, 2000.