Comments: Opec still has us over a barrel

Couple of points on Oil:

1. In the short term, there is a big chance of another disruption in the Gulf of Mexico this year because of the hurricane season. I think the prediction is something like 70% (but last year they said 80%, and it didn't happen, so make of that what you will).

2. One for the long term now: Crude production in Saudi Arabia declined 8% last year. In what seemed like a time of temporary price strength, it doesn't make sense that ALL the 8% was due to OPEC quota cuts. Other large oil fields have shown declines of 2-3% per year once they've passed their peak production, and there is growing evidence to suggest that Ghawar now falls into this category. So maybe some of the 8% decline is due to OPEC quotas, but that masks the real story that SA has passed peak.

3. On the refineries, the big oil companies have simply not put the investment into their infrastructure which is now decaying. It has also been running at very high capacity allowing no time for routine maintenance, but they have not sought to increase capacity. These two facts speak volumes about their long term view of production levels at refineries. They know that production of petroleum from crude oil is about to head into irreversible decline, so why put the investment in? The 90% capacity is temporarily inconvenient and delays maintenance, but soon it will be back down to 80% so the maintenance can be done (then 70%, 60%, etc etc).

The big question of course is how high prices (of crude and consumer fuels) will have to go before demand destruction can match production declines. Nobody knows, but I would not like to bet on it being anything other than "high"!

Posted by Minh at June 3, 2007 10:27 AM

To err is human David. I don't really think anyone expects that you have perfect predictive powers. But to admit to ones mistakes is certainly noble.

Posted by Jason Borr at June 3, 2007 02:22 PM

Dear David,
The conversation about oil always gets serious and sometimes very heated. To add another (more amusing?) dimension, in a recent paper,
(http://www.keele.ac.uk/depts/ec/wpapers/kerp0704.pdf)
we find strong evidence for the widespread
presence of “fuel tourism” and its impact on asymmetries in price transmission; the drivers in high-tax countries tend to travel to neighbouring low-tax countries reaping the price differentials, thus contributing to the demand abroad.
Pity that we need to go through the fuss of crossing the channel and fill up..
Many thanks

Posted by Costas Milas at June 3, 2007 05:50 PM
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