Posted on 11/03/2007 3:54:36 PM PDT by bruinbirdman
Oil at $100 a barrel? No way, says one defiant expert. Expect $60 crude--soon.
War in Iraq, destabilization from Turkey, unquenchable thirst for energy in Asia, millions of fuel-slurping SUVs still cruising American highways. No wonder oil prices have jumped above $90 a barrel on the new York Mercantile Exchange, on their way to $100.
Not so fast. According to some longtime observers, we will soon see $60 oil. Their argument is that the main driver of price spikes is something hardly mentioned these days: a miscalculation by the world's most important supplier, Saudi Arabia. And within the next two months that miscalculation will be corrected and oil prices will drop. "It's sure getting set up for a hard fall," says George Littell, partner at Groppe, Long & Littell, a Houston firm that advises oil drillers and investors on the outlook for crude prices since 1955.
Here's how Littell sees it. Last year Saudi petrocrats thought demand would slacken at the same time that oil production rose from sources outside the Organization of Petroleum Exporting Nations. They cut back Saudi production from 9.5 million barrels a day in March 2006 to 8.5 million a year later in order to keep supply and demand balanced and crude prices hovering around $60 per barrel.
The Saudis got one part of the equation right. The International Energy (otcbb: IENI.OB) Agency puts world demand at 85.9 million barrels a day, up only slightly from 2006. And among the 30 industrialized nations that make up the Organisation for Economic Co-operation & Development, demand has fallen by 100,000 barrels a day over that period.
But the Saudis overestimated non-opec production. While companies of many oil-producing nations are pumping cash into the declining oilfields of the North Sea, the Gulf of Mexico and elsewhere, those projects haven't contributed as much crude as analysts expected. "If demand is less, what's got to be driving the price of oil is lower opec production," Littell concludes. "It's a miscalculation on their part."
Check out the relationship between prices and production in the accompanying chart. The Saudis hold the key to long-term oil prices since they are one of the few exporters--Kuwait and Abu Dhabi are the others--with the ability to increase production significantly. Littell says the Saudis realized their mistake and began pumping more oil in May. At the most recent opec meeting on Sept. 11 members agreed to boost production by another 500,000 barrels a day starting Nov. 1. That increase included a bump in the Saudi quota to 8.9 million barrels a day.
How long before we get some relief? It takes at least a week for the Saudis to complete the paperwork necessary to ship oil to new customers, including arranging letters of credit and other financial details. Then the oil rides in a ship across the Atlantic for 30 days. Add them together and Littell expects the impact of all that additional oil to hit U.S. markets in a couple of months or so. The Saudis "didn't plan on $80 oil," he says. "They wanted to keep it around $60 and did the wrong thing."
Not everyone buys this argument. Certainly not the speculators who've been kicking up the price of oil on the nymex for more than a year. Leo Drollas, chief economist at the Centre for Global Energy (otcbb: GEYI.OB) Studies in London, believes that oil prices will fall eventually, but not until the middle of next year. Refiners are still trying to refill inventories that dropped to the lowest levels since 2003 after an unexpected cold snap in North America at the beginning of this year. The increase in opec quotas, Drollas calls "too little, too late." Besides, he says, "We're facing a winter with low [inventories], and the market's woken up to this." The mess in Iraq, which ships 1.5 million barrels a day through the Persian Gulf, and brinksmanship by Iran may keep prices from falling quickly.
Either way, the theory that China's galloping economy will lead to $100 oil is bunk. Forty percent of that country's oil is burned in so-called stationary uses like electric plants, Littell says, which will be shifted to less expensive fuels if oil prices stay high. Most industrialized countries made that shift decades ago.
Cheap natural gas can also drag down the price of oil--albeit with a lag, since it takes a while to bring gas wells online or to convert some petroleum consumption to gas consumption. At the moment, a million Btu of fuel oil costs $15.40, versus $7 for gas. Two years ago that $8.40 spread was zero. Today's spread will narrow.
Chart the cost of a barrel of oil against the dollar with the cost of the Euro against the dollar - oil hasn’t gone up, the dollar has been rapidly deflated by the Bush administration. In fact, the real price of oil, in hard currency, has gone down.
hmmm,... could it be nearing time to Short the Oil Market???
But.....but.....but....PEAK OIL!
With India and China’s consumption I dont see this happening. Demand is increasing
Sounds like a dissembling dance to hide the fixing of supply to get the price higher then pump more at the inflated price.
Keep dreaming. We’ve reached “peak oil” and we are coming down the other side. The Saudi’s can’t produce anymore, Venezuala will soon be a net importer of oil because of a Chavez. The Brits will become net importers of oil this year. The Dems won’t allow any new drilling in the US and alternative fuels aren’t realistic. George Littell doesn’t know what he’s talking about and never has.
We live in a world that’s awash in oil.
$100 is simply a result of governemnt interference with free markets.
There is an election next year. By October 1, 2007 the price of oil will be below $70 per barrel. My sympathies to whose of you who think that the free market determines the price of oil.
The only way we’re going to have $60 oil soon is if Iraq start to export substantial quantities of oil.
we need a bumper sticker:
driving or flying
thank our military
every false alarm starting with Katrina has jumped the price, and not once has it rolled back.
Checking the entrails for portents reveals that speculators have overbid oil futures and if margins were eliminated oil would drop $10 right away.
bump
Yes, but peak oil was last month. For those who wondered what peak oil would be like, this is what it is like.
OPEC will be attempting to increase 1/2 million barrels a day after all. That will be a stretch but they probably can do it. Any more than that anytime soon is probably not reasonable. This is peak oil, and has been for a month and until somebody stumbles across an easy 20 billion barrel pool somewhere which hasn’t happened since 1967.
There is a knife-edge of balance between how much the oil oligopoly can can restrict the supply and delivery of oil, and the point where it become economically feasible to turn to alternatives. That is one of the reasons why tar sands and oil shale have not yet been extensively developed, or a wide adoption of processes like Fischer-Tropsch coal to liquid fuel which are only in developmental stages. There would have to be a ginormous infrastructure development for these alternatives to come to market, and the least slip in the price of oil could destroy years of investment.
ping.
Many appear to think that the instant we hit peak oil we will suddenly run out altogether. That won't happen, and this won't either.
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