Barrel FeverDoes anyone know how much oil there is in the world?
By Yves Smith (who writes the Naked Capitalism blog. )
Posted Wednesday, June 25, 2008, at 6:54 AM ET
http://www.slate.com/id/2193825?wpisrc=newsletter
What is the "right" price for a barrel of oil? Japan's oil minister
said, based on fundamentals, the price of crude should be $60 a
barrel, not the $130 to $140 we see today. During congressional
testimony, five oil-industry CEOs each gave estimates of where oil
"ought" to be, with results ranging from $35 to $65 a barrel to $90.
Even the implacable Saudis are reportedly about to increase production
by half a million barrels a day, a sign that they are concerned that
the current price is too high. Yet BP's chief recently said current
price levels are warranted, and the oil bulls at Goldman forecast a
"super spike" to $150 to $200 a barrel.
How can presumed experts be so divided? Because the data on oil stink.
Think of the host of financial and economic statistics you see every
day: stock prices, unemployment data, company results, foreign
exchange prices, GDP growth rates. Market information is precise.
Government statistics, while a little fuzzier, are complied and
computed in a generally consistent fashion.
But oil is in a completely different category: It's a strategic
resource bought and sold internationally. Many countries, either by
indifference or design, simply don't provide reliable information.
Price is a result of demand and supply; the Wall Street Journal
recently explained why it's difficult to get a handle on demand. The
supply side is just as tricky.
The International Energy Agency, a premiere source of oil-related
information, was caught off guard by the surge in oil prices, so it
decided it needed to get a better grip on capacity. The IEA is only
partway through a survey of the world's biggest oil fields, yet says
it expects to show a significant reduction in estimated reserves.
But even when concluded, this project will be far from reliable. For
starters, take OPEC, which is estimated to control two-thirds of the
oil reserves and to provide 36 percent of oil production and is
largely unresponsive with IEA inquiries. And cooperation doesn't
always translate into insight. For instance, Iraq recently claimed it
has as much as 350 billion barrels of oil, triple its proven reserves
and more than even oil kingpin Saudi Arabia has. Is this claim
completely crazy? No one knows for sure; Iraq is underexplored, with
only 2,000 oil wells versus more than 1 million in Texas.
Here's how arcane the oil guessing game can get. Saudi's Ghawar oil
field is the world's largest; it's been pumping out oil since 1951 and
holds 7 percent of the world's proven reserves. Overall Saudi
production has been falling since 2005, yet the number of rigs in use
has tripled since 2004. Why is that? Some analysts believe the
increased rigs are intended to compensate for declining production
from Gwahar. Others argue that the Saudis are operating strategically,
shutting their most productive wells as prices rose and opening
smaller wells to better manage supply.
Experts have tried to come up with more independent and definitive
answers. The Saudis use water injection to increase oil recovery. Some
analyses of the water content from the northern part of Ghawar
conclude that the water content has risen from 20 percent in the 1940s
to 50 percent now, supposedly a sign that yields are about to fall
dramatically.
Seeking to resolve this debate, investment research firm Sanford
Bernstein performed a satellite analysis of the oil field, reviewing
high-resolution images dating back to 2001. The water-injection
methods used by the Saudis produce surface depressions when oil
reservoirs become depleted. Bernstein found no signs of surface
collapse. Instead, it found some areas slightly elevated, which might
indicate use of high-pressure recovery, an advanced extraction
technique. They concluded that only one of the oldest sections was in
decline. That report was dismissed as "junk science" by industry
analyst and peak-oil theorist Matthew Simmonds.
Indeed, some old oil hands argue that the entire method for computing
reserves is fundamentally flawed. Richard Pike, president of the Royal
Society of Chemistry, who spent 25 years in the petrochemical
industry, contends in an article in the Petroleum Review that
published estimates are less than 50 percent of their actual level. As
the Independent summarized his argument:
> Companies add the estimated capacity of oil fields in a simple arithmetic
> manner to get proven oil reserves. … However, mathematically it is more
> accurate to add the proven oil capacity of individual fields in a
> probabilistic manner based on the bell-shaped statistical curve used to
> estimate the proven, probable and possible reserves of each field. This way,
> the final capacity is typically more than twice that of simple, arithmetic
> addition.<
Pike is no oil-industry shill and contends that producers understand
this issue but prefer show lower totals, to help support high oil
prices.
Economists think they can cut the Gordian knot of the oil
supply/demand debate. Paul Krugman (along with others) has argued that
if the spot-market price exceeds the level at which production meets
end-user demand, inventories will rise—a far easier measurement to
track than trying to estimate world demand and supply.
Yet 2008 oil supplies remain within recent historical ranges, which
would mean that current prices reflect fundamental forces.
Ah, but there's a flaw in the analysis, as floor trader and columnist
Daniel Dicker noted:
>[O]il storage has been historically inelastic, no matter the
price. … [O]ver the last 4 years (and for most of my trading life)
forward [supplies] have always hovered between 50 and 55 days—storage
is expensive and limited, and just not efficacious.
>This is why … supply arguments are often overblown … supplies
remain closely aligned to demand and rarely overrun—as OPEC members
have time and again explained but are ignored.<
In other words, if prices are excessive, oil gets inventoried, all
right, but in the ground. Which explains the keen interest in finding
out how much is really there. Just don't hold your breath waiting for
a precise answer.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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