The International Energy Agency (IEA) gave the oil market a boost when it said supply would remain tight and that the world was in the middle of its third oil shock. Thanks for the newsflash IEA.
"With oil prices hitting 140 U.S. dollars," said IEA Executive Director Nobuo Tanaka, "we are clearly in the third oil shock, with prices affecting economic growth, truck drivers are going on strike. Airlines are closing down."
The IEA said high prices would discourage demand for oil in the short-term, but in the medium-term, "demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture."
The IEA remains in a remarkable state of delusion about the world's ability to increase oil supply. It projects that global demand will grow from 86.8 million barrels per day this year (with supply of around 88mbpd) to 94.14mpbd in 2013. That's an increase in global production of 8.5%.
Let's see. Where will that come from? Well, assuming there is no decline in current production, you could double Iraq's production, throw in 2mpbd from the Saudis and their spare capacity and new fields, chuck out Chavez and get Venezuela humming again, and bring on-stream a lot of the deep-water projects...and maybe, just maybe you'd get there.
Crhistophe de Margerie, the CEO of French oil company Total, says 94mpd is an optimistic forecast in ten years, and probably the peak anyway. "We will have to fight against the natural decline of (present) oil fields," he said "It will not go smoothly."
You can fight against some things...love handles, injustice, heavy traffic. But if you pick a fight with something like gravity, you're going to lose every time, and probably injure yourself. The natural decline in the production on an oil field can be "fought" with some methods to enhance recovery. But depletion is depletion. They don't make Botox for oil fields.
In any event, the IEA announcement did not create a super spike in oil. This leads us to believe oil may be running out of gas, at least in the short-term. Event-driven price increases are almost all played out, barring an Israeli attack on Iran. If that happens, all bets are off. Keep in mind, though, that oil prices actually fell when the first Gulf War began. They did the same in 2003. We're not saying the same would happen this time, especially if the Iranians tried to clog up the Strait of Hormuz.
But the real reason prices may have topped out is that the world is having a hard time coping with $140 oil. Could it live with $200 oil? Who could afford it? At its current price, oil is killing the airlines and destroying truck drivers. Also, gold seems to be catching up with oil as the most attractive anti-inflation investment alternative.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 3 July 2008:
The big story of the day is the impact that all of this is having on General Motors. While they may be solvent at the moment, there are limits to how far they can trade the company into insolvency before seeking Chapter 11 protection. If the sums don't add up Wagoner and his co-executives will need to act sooner rather than later so as to protect themselves. My thinking is that the debtors in possession would liquidate most of the business rather than refinance. Who would refinance GM (with debt of equity ) anyway when it would be a lot cheaper (and more profitable) to just buy the production line assemblies, disigns and badges off the debtors. GM Finance will be swallowed separately.
I’m not a hydrocarbon extraction engineer but I have heard that a lot of the problem is "mid stream" that is a lack of refinery capacity. Existing refineries are not (I guess) up to the task of refining (available) heavy, sour, high sulphur crude into petrol, diesel and kero/avtur.
Without higher oil prices is there likely to be any investment in refineries, particularly given peak oil scenarios and the certainly almost everyone is now psychologically locked onto the vision oil substitutes, economical cars and a level of energy independence.
Comment by Freak'd on 3 July 2008:
Apparently, according to Newsweek, oil price rises are mainly a result of an dastardly plot of those rotten Iranians - and so you guys must have rocks in your head!! Hahaha. See http://www.newsweek.com/id/47632
Investing tip - check Newsweek for what not to do.
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