[CrashList] who predicted what
jones118 at lineone.net
Tue Sep 19 02:45:18 MDT 2000
["Only a significant fall in IEA's expected world oil consumption for 2000
can reduce the risk of a supply shortfall later this year, and then only if
OPEC substantially or completely lifts its production quotas in March."
This is what Fleay wrote in March this year. Was he right or wrong?
Was there a supply shortfall recently, all you economists?
Was Colin Campbell right or wrong to predict major shortfalls in the
the year 2000 (he made the prediction in 1998)? Check for
yourselves. Take the energy-deficit problematique seriously
and then start thinking about the future. Mark]
OIL SUPPLY: THE CRUNCH HAS ARRIVED!!
By Brian J Fleay
13 March 2000
In December 1997 the Asian Financial Meltdown began to bite ending over 20
years of high economic growth there. The Organisation of Petroleum
Exporting Countries (OPEC) also increased their production quotas,
responding to the highest consumption growth in 1996-97 since the 1970's
while the UN Security Council increased Iraq's so-called oil-for-food
quota. The 1997-98 northern hemisphere winter was mild and demand for
heating oil was low. Consequently 1998 saw a fall in Asian oil consumption
ending years of high growth with world consumption the same as in 1997
while production expanded.
Oil prices fell from US$23 a barrel in December 1997 to US$10 a barrel in
February 1999, nearly equalling in real terms the lowest prices ever. OPEC
countries faced severe financial crises with the threat of political
unrest. Falling cash flow forced western oil companies to cut back
exploration and development work and shed experienced staff, weakening even
further their capacity to operate in upstream oil. In many areas
production costs exceeded the price of oil, wells were shut down with some
never to be turned on again, especially 'stripper wells' in the USA. Many
of the investment cut backs were for development work to counter falling
output from ageing oil fields. Running fast to just stand still became
To counter this financial disaster the OPEC cartel in March 1999 further
reduced its production "quotas" to a total cut back of 4.32 million barrels
per day (m.bbls/d). Oil prices began to rise in April and most oil
analysts predicted OPEC discipline would not hold and forecast low prices
to continue for at least three years. The more perceptive analysts, aware
of how tight supply was and of the looming spectre of depletion, predicted
WHY WERE THE ANALYSTS WRONG?
Firstly, OPEC quota discipline held at around 90% through 1999. Prices
continued to rise and were over US$20 a barrel by August.
Secondly, from mid-1999 Asian economies began to recover sooner and more
quickly than everyone expected, and with it their oil consumption. Oil was
the principal fuel powering the "Asian Tigers" economic growth. A booming
US economy was also fuelling higher oil consumption, and both impacts
resonated around the world. Oil consumption rose by 1.6% to 75.2 m.bbls/d
in 1999 with the increase gathering pace as the year progressed.
By October consumption was exceeding supply, according to the International
Energy Agency (IEA), with stock draw downs of 0.7 m.bbls/d in October, 1.6
m.bbls/d in November, 4.7 m.bbls/d in December, 0.5 m.bbls/d in January and
continuing into February while OPEC quota compliance fell to 75%. In other
words the OPEC "shut-in" production is down to about 3.2-3.3 m.bbls/d and
the falling inventories of crude and petroleum product are starting to
encroach upon that required for secure operation of the supply system which
is becoming increasingly vulnerable to minor disturbances. Oil prices have
risen to over US$30 a barrel.
Non-Persian Gulf oil is peaking
Thirdly, there is a growing consensus in the oil industry and among other
analysts that oil production outside the Persian Gulf will peak in 2000
through 2001. North Sea oil will peak this year according to the London
based Petroleum Review of February 2000. Mexico's largest oil field,
offshore Cantarell, has a gigantic $1 billion nitrogen injection project
about to be commissioned to re-pressurise the field to offset decline and
requiring a further 12 year $9 billion investment to keep the pressure up.
The enforced investment cut backs of 1998-9 are now showing themselves as
faster production declines in North America, the North Sea and possibly
Venezuela which faces a similar situation to Mexico. African producers and
China face similar prospects over the next two years.
Non-Persian Gulf oil will peak at about 55-56 m.bbls/d with about 10
m.bbls/d of this coming from OPEC producers. The IEA forecasts consumption
of 77 m.bbls/d in 2000, an increase of 2.4% on 1999 with consumption in the
successive four quarters of 77.2, 75.4, 76.6 and 78.8 m.bbls/d
respectively. That means Persian Gulf producers have to supply 21-22
m.bbls/d average for the year and 22.8 m.bbls/d in the fourth quarter.
Their output in 4Q 1999 was 19 m.bbls/d and the maximum is about 23
m.bbls/d. However, it is not possible to operate such a supply system at
or near 100% capacity all the time, there are always supply hiccups.
The 2Q is normally the time stocks are replenished following the northern
hemisphere peak and in preparation for the summer driving season and
subsequent winter peak. However, in the absence of an increase in OPEC
production this will be difficult. OPEC meets in March to review quotas.
It looks as though quotas will be partially lifted. But there are signs
that OPEC members are looking backwards at the price falls that have
accompanied past quota rises and will be wary about ending quotas. It
would be June before such increases could come into full effect as it takes
two months for oil to move from the exporters shipping terminal to the
If the IEA's consumption expectations are fulfilled, even with OPEC quotas
lifted in March, supply will be extremely tight in the second half of 2000.
POST 2000 SUPPLY SHORTFALL
Mid 1990's forecasts
Oil supply analysts like Colin Campbell have for many years forecast that
non-Persian Gulf oil would peak around 2000, Persian Gulf production would
peak about 2011-12 and the world as a whole between 2006-08. The latter
forecasts have always assumed that the needed investment in exploration and
oil field development would occur in time on the scale required, especially
in the Persian Gulf. What is the true position?
A series of articles in the US Oil & Gas Journal around 1994-96 discussed
the prospects for OPEC as a whole and the Persian Gulf producers to meet
expected production in 2000 and 2005. Around $100 billion was seen as
necessary by 2005 with just under half in the Persian Gulf countries who
would provide 75% of the net production increase, indeed the only area in
the world where significant increases are possible at low cost. Oil
consumption in 2000 is at the higher end of these forecasts and non-Persian
Gulf production a bit higher.
The bulk of non-Persian Gulf investment was required to sustain production
from ageing oil fields - with 60% of the Persian Gulf investment needed for
the same purpose. There is a substantial backlog of such investment. Such
rehabilitation investment is particularly needed in Iraq and Iran where the
consequences of war and sanctions have taken their toll. Several producers
maximum production is now below levels attainable in the1970's.
It is difficult to get reliable information on the physical status of these
oil fields and the level of investment to date. But one thing is certain
there is a substantial backlog of Persian Gulf investment needed to meet
expected post-2000 oil consumption growth, in the order of tens of billions
of dollars. Once the barriers to such investment are removed it will take
about two to four years for this to translate into oil production.
So it will be 2003-04 before meaningful expansion of world oil production
beyond the 2000 level is possible!! Remember by then non-Persian Gulf
production falls will be very visible, particularly in the North Sea. The
scale of the investment is beyond the internal financial and technical
resources of these countries. This may not have been the case if sustained
investment had begun five years ago.
Barriers to Persian Gulf oil investment
What are the main obstacles to Persian Gulf oil investment?
Firstly there is a lack of awareness of the realities of oil depletion,
over-optimistic expectations of the gains to be made by technology and
inconsistencies in the statistics for production and reserves and there
interpretation, factors that together create a false optimism and lack of
awareness of how tight supply is becoming.
Secondly, low oil prices have inhibited investment, and until recently the
large excess of supply over consumption which was mostly concentrated in
the Persian Gulf. Growing populations and low oil prices have
substantially reduced the per capita income of these countries who now have
to import food on a substantial scale to feed their populations. Along
with welfare (for the elite as well as the masses) and the military, little
has been left in budgets for oil investment.
Thirdly, and the most important are the political constraints to
investment. Iraq and Iran have the most urgent need to upgrade
infrastructure. US inspired sanctions effectively prohibit this,
sanctions that now seriously threaten the political and economic stability
of the world. These are unlikely to be lifted before the US Presidential
elections and what happens after that may depend on who is President and
the composition of congress.
The scale and speed of outside investment and technical support needed is a
sensitive internal political issue for the countries concerned where their
is considerable criticism of the extravagances of the ruling elites
compounded by a generation change. Iran has over 6o million people and
over half are under the age of 25.
It is not in the long term interests of these countries to blow there oil
quickly, but rather ration it out at high prices, but not at a level that
damages the world economy.
The March and September 2000 meetings of OPEC will be critical in this
regard as will the interactions with the US Presidential elections and
six-monthly re-negotiating of the UN's so-called oil-for-food agreement
with Iraq, due in May and November.s
Only a significant fall in IEA's expected world oil consumption for 2000
can reduce the risk of a supply shortfall later this year, and then only if
OPEC substantially or completely lifts its production quotas in March.
Supply shortfalls are inevitable after 2000 to at least 2003 due to the
lack of appropriate investment in the Persian Gulf countries. If the
political obstacles to this investment are delayed unduly then the supply
shortfalls will last longer.
As a consequence the peaking of non-Persian Gulf oil production in
2000-01will merge with the previously anticipated 2006-09 world peak into
one decade long peaking event.
Australia's oil self -sufficiency is expected to deteriorate rapidly next
decade. Oil imports were approximately A$1.2 billion in 1999 and could
reach A$10 billion by 2010 at current oil prices and exchange rate for
business-as -usual consumption, half that by 2003. The annual trade
deficit is under A$10 billion at present. Business will not be "as usual".
A better appreciation will be possible after 10 April when th IEA publishes
its quarterly report on www.iea.org
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