Shale vs crude: Why oil prices are on a free fall even as Opec members suffer

The latest price of the Indian basket for crude oil was at $35.72 per barrel. It has fallen by 16% over the last one month and by 33% since end December 2014.
Yesterday, the Brent crude oil was selling at $37-38 per barrel. Lower quality oil is selling at even below $30 per barrel. As Amrbose Evans-Prtichard writes in The Telegraph: “Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31.”

What has led such low levels of oil price? Over the last one year, the Organization of the Petroleum Exporting Countries(OPEC), an oil cartel of some of the biggest oil producing countries in the world, has been flooding the market with oil in order to make the shale oil being pumped in the United States, unviable. Pumping shale oil is an expensive process and is not viable at lower oil price levels.

In fact, the oil ministers of the OPEC countries met in early December and they pretty much decided to continue doing things the way they have been up until now, over the last one year. In the past, any likely slowdown in oil prices was met with oil production cuts within the OPEC. That hasn’t happened over the last one year and isn’t happening now either.

As the International Energy Agency(IEA) points out in its monthly oil report for December 2015: “OPEC’s decision to scrap its official production ceiling and keep the taps open is a de facto acknowledgment of current oil market reality. The exporter group has effectively been pumping at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply.”

The rise in the supply of non-OPEC oil has primarily happened on account shale oil being pumped in the United States and to some extent in Canada, over the last few years. In order to make companies pumping shale oil unviable, OPEC has been relentlessly pumping oil. As the IEA monthly report points out: “OPEC supply since June has been running at an average 31.7 million barrels per day, with Saudi Arabia and Iraq – the group’s largest producers – pumping at or near record rates. Riyadh has held supply above 10 million barrels per day since March to satisfy demand at home and abroad while Iraq, including the Kurdistan Regional Government (KRG), is doing its level best to keep production above the 4 million barrels per day mark first breached in June.”

Also, as oil prices have fallen, OPEC and non-OPEC oil producing countries have had to pump more and more oil, in order to ensure that their governments have some money going around to spend. As the Russian finance Anton Siluanov told Ambrose. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on.”

Further, sanctions against Iran are likely to be lifted early next year and more oil will then hit the international oil market. The Financial Times quotes an oil trader as saying: “It seems the Iranians are fulfilling the requirements for the lifting of sanctions faster than expected.” said one London-based oil trader.

The IEA monthly report expects the extra oil from Iran to add 300 million barrels to the already swelling oil inventories. In fact, the November 2015 oil report of the IEA had put the total global stockpiles of oil at 3 billion barrels.

So how long will this last? Given the number of factors that impact the price of oil, predicting which way it will head, has always been tricky business.  As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of PredictionTake the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Nevertheless, it seems that one year down the line the Saudi strategy of driving down the price of oil, in order to drive down non-OPEC oil production seems to be working. As the IEA oil report points out: “There is evidence the Saudi-led strategy is starting to work. Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 million barrels per day in November from 2.2 million barrels per day at the start of the year. A 0.6 million barrels per day decline is expected in 2016, as US light tight oil – the driver of non-OPEC growth – shifts into contraction.”

Also, it is worth pointing out here that oil exporting countries are having a tough time balancing their budgets. The fiscal deficit of Saudi Arabia has touched 20% of its gross domestic product (GDP). Fiscal deficit is the difference between what a government spends and what it earns. As Evans-Pritchard puts it: “Opec revenues have collapsed from $1.2 trillion a year in 2012 to nearer $400 billion next year.”

Hence, it is safe to say that the OPEC strategy of driving down the price of oil is hurting the member countries. Given this, the price of oil cannot be at such low levels for much long. But at least in the short run, the oil price will continue to stay low.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on December 15, 2015

Why oil prices have fallen below $40 per barrel

light-diesel-oil-250x250A few months back I wrote a series of columns on oil. In these columns, I maintained that it is very difficult to predict the price of oil over the long term, given that there are way too many factors involved, other than just demand for and supply of the commodity. At the same time I said that in the short-term the price of oil will continue to go down. And that is precisely what has happened.

Data from the Petroleum Planning and Analysis Cell (PPAC) tells us that as on December 8, 2015, the price of the Indian basket of crude oil stood at $ 37.34 per barrel. In fact, during the course of this week, oil prices have touched a seven year low.

What is happening here? The Organization of the Petroleum Exporting Countries (OPEC), an oil cartel of some of the biggest oil producers in the world, met last Friday on December 4, 2015.

The statement released by OPEC after the meeting as usual was very general in nature. It said: “emphasizing its commitment to ensuring a long-term stable and balanced oil market for both producers and consumers, the Conference [i.e. OPEC] agreed that Member Countries should continue to closely monitor developments in the coming months.”

What does this “really” mean? In the past, the OPEC has adjusted its oil production depending on oil demand. If the demand was high, it increased production so as to ensure that oil prices did not go up too much. This was done in order to ensure that other forms of energy did not become viable. If the demand was low, it cut production in order to ensure that oil prices did not fall too much.

In the last one year, OPEC has abandoned this strategy primarily on account of all the oil that is being produced by the shale oil companies in the United States. As shale oil started to hit the market, the OPEC countries started to lose market share. Hence, they decided not to cut production any further, and try and maintain market share, even if that meant low oil prices.

The major producers within the OPEC (the likes of Saudi Arabia, Kuwait and Iraq) produce oil at anywhere between $9 to $20 a barrel. It costs anywhere between $29 to $90 per barrel to produce shale oil, as per the International Energy Agency (IEA).

Hence, the idea was to engineer low oil prices and in the process make shale oil unviable and help OPEC countries maintain their market share. Nevertheless, despite low oil prices, the US shale oil industry is not shutting down at the rate it was expected to, when the price of oil started to fall, around a year back.
And this explains why OPEC continues to produce oil full blast. It wants to kill the US shale oil industry. Further, what the OPEC’s statement released last Friday really means is that the cartel will maintain its production at over 31.5 million barrels per day. In fact, members of the OPEC have always known to cheat on the side and produce more than their allocated quotas. Hence, the daily production is likely to be more than 31.5 million barrels per day.

As the newsagency Bloomberg reported: “There’s as much as 2 million barrels of oversupply in the market, and OPEC’s meeting on Friday means “everyone does what they want,” Iran’s Oil Minister Bijan Namdar Zanganeh said in Vienna on Dec. 4.”

Take a look at the following two charts from the International Energy Agency. One is a chart showing the World Oil Supply. And the other shows World Oil Demand.

world oil supply


world oil demand


As per the chart, the World Oil Supply during the period July to September 2015 was at 96.9 million barrels per day. The demand on the other hand was lower than the supply at 96.35 million barrels per day.

The OPEC oil supply during the period July to September 2015, went up in comparison to the period April to June 2015. The OPEC production between April to June 2015 was at 31.5 million barrels per day. Over the next three months it jumped to 31.74 million barrels per day. Hence, OPEC contributed significantly to the jump in global oil supply.
opec crude oil supply

In fact, the production of OPEC is likely to increase in the months to come as the sanctions on Iran are lifted and the country is allowed to export more oil.

Over and above this, the global oil inventory is at a record high. As a recent IEA report points out: “Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil. Demand growth has risen to a five-year high…with India galloping to its fastest pace in more than a decade. But gains in demand have been outpaced by vigorous production from OPEC and resilient non-OPEC supply – with Russian output at a post-Soviet record and likely to remain robust in 2016 as well. The net result is brimming crude oil stocks that offer an unprecedented buffer against geopolitical shocks or unexpected supply disruption.”

As the report further points out: “The stock overhang that first developed in the US on the back of soaring North American crude production, has now spread across the OECD. Since the second quarter, inventories in Asia Oceania have swollen by more than 20 million barrels. In Europe, record high Russian output and rising deliveries from major Middle East exporters are filling the tanks.”

What this clearly means is that oil prices are likely to stay low over the next few months. Further, the forecast is for a fairly mild winter in Europe as well as North America. This means that the demand for diesel, which is the fuel of choice for heating in Europe as well as North East America, is unlikely to go up at a rapid rate. The stockpiles of diesel are at a five-year high.

The column originally appeared on The Daily Reckoning on December 10, 2015

Eight things you need to know about falling oil prices


Vivek Kaul

The price of oil has been falling for a while now. As I write this the brent crude oil is selling at around $80.4 per barrel. There are several reasons behind the fall and several repercussions from it as well. Let’s look at them one by one.

1) The Chinese demand for oil has not been growing at the same rate as it was in the past, as Chinese economic growth has been falling. As Ruchir Sharma, head of Emerging Markets and Global Macro at Morgan Stanley Investment Management wrote in a recent column in The Wall Street Journal “The growth rate in Chinese demand for oil has plummeted to nearly zero this year, down from 12% in 2010. This is arguably the main reason why oil prices are down.”
2) In the past when oil prices fell, the Organization of Petroleum Exporting Countries (OPEC) led by Saudi Arabia used to cut production to ensure that supply fell and that ensured that prices did not continue to fall. This hasn’t happened this time around. As the Saudi oil minister Ali Naimi told Reuters on November 12, “Saudi oil policy has been constant for the last few decades and it has not changed today.” He added that: “We do not seek to politicise oil…for us, it’s a question of supply and demand, it’s purely business.”
And what is this pure business Al Naimi is talking about? The United States and other western nations like Canada have had a boom in shale oil production. This boom has led to the United States and Canada producing much more oil than they were a few years back. Data from the U.S. Energy Information Administration shows that United States in 2013 produced 12.35 million barrels per day. This is a massive increase of 35% since 2009. In case of Canada the production has gone up by 22.8% to 4.07 million barrels per day between 2009 to 2013.
Shale oil is very expensive to produce and depending on which estimate one believes it is viable only if oil prices range between $50 and $75 per barrel. Hence, by ensuring low oil prices the Saudis want to squeeze out the shale oil producing companies in Canada and United States.
3) So is the Saudi policy working? The US Energy Information Administration in its latest Drilling Productivity Report said that the seven largest shale oil companies will produce 125,000 barrels more per day in December 2014 in comparison to November 2014.
Hence, the Saudi strategy of driving down oil prices to ensure that the production of oil by shale oil companies is no longer viable, hasn’t seemed to have had an impact yet. Nevertheless that doesn’t mean that a fall in oil prices will have no impact on shale oil production.
International Energy Agency (IEA) has said that the investment in shale oil fields will fall by 10% next year, if oil prices continue to remain at $80 per barrel. Faith Bristol, chief economist of IEA recently said “there could be a 10 per cent decline in US light tight oil, or shale, investment in 2015 [from full-year 2014 levels]”…I wouldn’t be surprised to see statements from different companies in the weeks and months to come [outlining a change in] their investment plans and reducing budgets for investments in North America . . . especially the United States.” And this will have an impact on the production of shale oil in the medium term, if Saudis continue to sustain low oil prices.
4) Nonetheless, the interesting thing that the United States and other Western nations may never have to increase production of shale oil, just the threat of doing that will act as an insurance policy. As Niels C. Jensen writes in the Absolute Return Letter for November 2014 “There is nothing easier to get used to in this world than higher living standards, and the populations of most oil producing nations have seen plenty of that in recent years. Shale [oil] is a threat against those living standards, and falling oil prices are the best assurance they can hope for that shale [oil] will never become the major production factor that we are all being told that it could become. It is very expensive to produce and thus requires high oil and gas prices to be economical.”
But even with that shale oil can act as an insurance policy against high oil prices, feels Jensen. As he writes “In a rather bizarre way, shale [oil] has thus become an insurance policy, as the western world never have to ramp up shale production to levels that have been discussed. The sheer threat of doing so should keep the oil price at acceptable levels.”
5) Also, low oil prices are going to benefit nations which import oil. “A $20-per-barrel drop in oil prices transfers $6-700 billion from oil producing nations to consumers worldwide or nearly 1% of world GDP. Assuming consumers will spend about half of that on consumption, which historically has been a fair assumption, the positive effect on GDP in consumer countries is 0.5%,” writes Hunt. And this is clearly good news for oil importing nations like India. Falling oil prices are also benefiting airlines and shipping companies given that oil is their single biggest expense.
6) News reports suggest that China is using this opportunity to buy a lot of oil. As a recent report on Bloomberg points out “The number of supertankers sailing toward China’s ports matched a record on Oct. 17 and is still close to that level now.”
7) The countries that are likely to get into trouble if oil prices continue to remain low are primarily Russia and Iran. Russia relies heavily on exports of oil and gas. As a recent article on points out “In 2013, for example, Russia’s energy exports constituted more than two-thirds of total exports amounting to $372 billion of a total $526 billion.” Further, the Russian government’s budget gets balanced (i.e. its income is equal to its expenditure) at an oil price of anywhere between $100-110 per barrel. Iran’s case is similar. Hence, both these countries need higher oil prices.
As a recent Oped in the Los Angeles Times points out “Russia and Iran compete with Saudi Arabia in the international oil market, and both need oil prices to be at roughly $110 a barrel in order to balance their budgets. If oil prices remain at $80 a barrel, the strategic ambitions of Tehran and Moscow could be severely undermined.”
8) Saudi Arabia also gets hit by a lower oil prices. “Saudi produces close to 10m barrels per day, similar to Russian output. A $20 fall in the oil price, costs Saudi Arabia about $200m per day,” a recent article in The Independent points out.
But Saudi Arabia has more staying power than the others. The fact that
Aramco (officially known as Saudi Arabian Oil Company) has deep pockets is a point worth remembering. As Vijay Bhambwani, CEO of recently told me “Saudis can produce low cost arab light sweet crude very cost efficiently and only the recent state welfare schemes implemented after the arab spring, have raised the marginal costs. Even a slight rollback / delayed released of the additional welfare payments (US $ 36 billion) can add sizeable cash flow into the Saudi national balance sheet and give it additional staying power.”
To conclude, there are many different dimensions to falling oil prices and the way each one of them evolves, will have some impact on oil prices in the days to come .

The article originally appeared on on Nov 13, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Why Moily’s idea of buying oil from Iran won’t work

M-Veerappa-Moily_0Vivek Kaul
India is thinking of importing more oil from Iran than it currently does. In a letter to the Prime Minister Manmohan Singh, oil minister Veerapa Moily, suggested that “An additional import of 11 million tonnes during 2013/14 would result in reduction in forex outflow by $8.47 billion (considering the international price of crude oil at $105 per barrel).” (As reported by Reuters).
This is because Iran accepts payments in rupees and not dollars as is the case with most of the other oil exporters. This will help India save precious foreign exchange.
While theoretically this idea makes immense sense, it is not really a solution that India will be able to execute. The United States and the European Union have placed sanctions on Iran over its nuclear programme. As Reuters reports “U.S. and EU sanctions placed on Iran over its nuclear programme have reduced its oil exports more than half from pre-sanction levels of about 2.2 million barrels per day (bpd). In the first half of 2013, imports of Iranian oil from its four biggest buyers – China, India, Japan and South Korea – fell more than a fifth from a year ago to around 960,000 bpd.”
India’s oil imports from Iran have declined by 46% to 185,700 barrels per day during the first seven months of the year, in comparison to the same period last year. And this is because of the sanctions.
Oil is bought and sold internationally in dollars. This started sometime after the Second World War. President Franklin D Roosevelt realised that a regular supply of oil was very important for the well being of America or what came to be known as the great “American dream”.
After the end of the Second World War Roosevelt travelled quietly to USS Quincy
a ship anchored in the Red Sea. Here he was met by King Ibn Sa’ud of Saudi Arabia, a country, which was by then home to the biggest oil reserves in the world.
The obsession of the Untied States with the automobile had led to a swift decline in domestic reserves, even though America was the biggest producer of oil in the world at that point of time. The country needed to secure another source of assured supply of oil. So in return for access to oil reserves of Saudi Arabia, King Ibn Sa’ud was promised full American military support to the ruling clan of Sa’ud. This oil was sold in dollars.
This was one of the major reasons behind the dollar becoming the international reserve currency. Every country in the world needed oil. And for countries that did not produce enough of their own oil they needed dollars they could use to buy oil from other countries.
This continued till the 1970s. In the seventies, after the end of the gold standard, the dollar started to lose value rapidly against other currencies and against gold. This meant that the purchasing power of the OPEC countries which sold oil in dollars and then used those dollars to import goods they did not produce, came down dramatically.
As William Greider writes in 
Secrets of the Temple: How the Federal Reserve Runs the Country “The dollar had already lost one-third of its value in only half a dozen years and seemed headed toward even steeper decline… Oil trades worldwide in dollars and if the U.S. was going to permit a free fall in the dollar’s value, that meant the oil-producing nations would received less and less real value for their commodity.”
One impact of this was OPEC countries raising the price of oil. Another impact was that some of the OPEC countries wanted to price oil in several currencies rather than just the American dollar. Jahangir Amuzegar, who was an economist by training, and had been a minister in the government of Iran, as well as a negotiator for OPEC, outlined some of these proposals in a 1978 article. In this article he outlined several currency combinations that could be used to price oil. Iraq, Qatar, United Arab Emirates and Venezuela were in support of this plan.
The idea was not to be dependent on one currency, but a number of currencies and hence iron out any fluctuations in the value of one currency. Moving to a basket of currencies at that point of time clearly made sense for OPEC as far as future revenues were concerned.
As per estimates of the US department of treasury, Saudi Arabia, the largest member of OPEC, would have been better off if it had priced oil in a basket of currencies instead of the dollar, in all but 18 months since 1973.
So what was stopping Saudi Arabia and OPEC from moving to pricing oil in a basket of currencies rather than the dollar? As David E Spiro writes in 
The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets: “The Saudis, however, had the greatest proportion of dollar-denominated reserves in OPEC. This means that their reserves were diminished by the depreciation of the dollar (compared to the basket of their imports). But it also meant that they had the most to lose if a shift by OPEC to a basket of currencies threatened international confidence in the dollar. Having agreed to invest so much in dollars, the Saudis now shared a stake in maintaining the dollar as an international reserve currency. On the one hand dollars constituted 90% of Saudi government revenues in 1979, and those revenues were subject to the same fluctuations as the dollar. On the other hand, the Saudi investments were, roughly at same time 83% dollar denominated. The choice was whether to stabilise current revenues threatening the worth of all the past revenues (since invested in dollar assets).”
Also, as mentioned earlier, Roosevelt had stuck a deal with the ruling clan of Al Sa’uds. It is important to remember that the American security guarantee made by President Roosevelt after the Second World War was extended not to the people of Saudia Arabia nor to the government of Saudi Arabia but to the ruling clan of Al Sa’uds. So they had an intrest in selling oil in dollars and keeping the dollar going as an international reserve currency.
Also other than being the largest producer of oil Saudi Arabia also had the largest reserves among all OPEC countries. It had 39% of the proven OPEC reserves. Within OPEC it had the almost unquestioned support of what were known as the sheikhdom states of Bahrain, Kuwait, United Arab Emirates and Qatar. These countries faced threats from other OPEC members like Iraq and Iran. For many years, Iraq had been eyeing Kuwait. It had tried to annex Kuwait in 1961 (and then again in the early 1990s).
Hence, the support of Saudi Arabia, the largest nation in the region, was important for them
If we added the reserves and production of the sheikdom countries which supported Saudi Arabia, they were together responsible for 50% of OPEC’s production and owned nearly 61% of its proven reserves. So, when Saudi Arabia made the decision that OPEC oil would be continued to be priced in dollars, there wasn’t much option for the other OPEC members but to follow what the largest member had decided.
What this brief history of oil tells us is that for dollar to continue being an international reserve currency, it is very important that oil continues to be sold in dollars. Other countries need to earn these dollars whereas the United States has the exorbitant privelege of simply printing them and spending them.
Iran has been trying to challenge this hegemoney of the dollar for a while now. It 
has been trying to move the buying and selling of oil away from the US dollar. In late 2007, Iran claimed to have moved all of its oil sales to non dollar currencies, with most of it being sold in euros and a small part in yen. There were no independent reports confirming the same.
The United States and Iran have been at each other’s throats since the 1979 revolution in Iran which overthrew the King. Lately there has been tension because of Iran’s nuclear programme.
Mahmoud Ahmadinejad, who was the President of Iran till around a month back, has called the dollar “
a worthless piece of paper”. News reports suggest that Iran has started accepting renminbi from China and rubles from Russia in lieu of the oil that it exports to these countries.
In fact in a November 2007, summit of OPEC, Iran had suggested that OPEC oil should be sold in a basket of currencies rather than the American dollar. But it did not get the support of other members except Venezuela. Hugo Chavez, the late President of Venezuela, was known to be a vocal critic of the United States

On February 17,2008, Iran set up the Iranian Oil Bourse, for the trading of petroleum, petrochemicals and natural gas, in currencies other than dollar, primarily the euro and the Iranian rial. But the exchange since inception has not traded in oil but products made out of oil which are used as a feedstock in pharmaceutical and plastic industries.
Reports in the Iranian press suggested that the bourse started trading oil in non dollar currencies from March 20,2012. India wanted to pay for Iranian oil, either in gold or in rupees. If India paid in rupees, Iran could use those rupees to import goods from India.
This move to pay for oil in rupees or gold was a clear attempt to undermine the dollar in the buying and selling of oil, something that keeps the dollar at the heart of the international financial system. Hence, great pressure was applied by America on India to stop its oil imports from Iran and source its needs from some other producer.
India’s oil imports from Iran in April 2012 fell by 34.2% to 269,000 barrels per day from 409,000 barrels per day in March 2012. The government of India asked the Indian oil refiners to cut Iranian oil imports and they obliged.
What this tells us in a very clear way is that even though the US dollar may not be in the best of shape, but any attempts to mess around with its international ‘currency’ status will not be taken lying down. And for dollar to maintain its international currency status it is important that oil continues to be bought and sold in dollars.
So if the United States could pressurise India into cutting down its oil purchases from Iran in March 2012, it can do the same in September 2013. Any move away from dollar , which in turn will undermine access to “easy money” which has been so important to what is now called the American way of life.
Also it is best to remember that financially America might be in a mess, but by and large it still remains the only superpower in the world. In 2010, the United States spent $698billion on defence. This was 43% of the global total.
The article originally appeared on on September 2, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why oil prices won’t come down in the foreseeable future

Vivek Kaul
It is India’s Rs 2,00,000 crore problem. And it’s called crude oil.
With the global economy in general and the Chinese economy in particular slowing down, it was widely expected that the price of crude oil will also come down.
China has been devouring commodities at a very fast rate in order to build infrastructure. As Ruchir Sharma of Morgan Stanley writes in his recent book Breakout Nations “China has been devouring raw materials at a rate way out of line with the size of its economy…In the case of oil China accounts for only 10% of total demand but is responsible for nearly half of the growth in demand, so it is the critical factor in driving up prices.”
Even though the Chinese growth rate has slowed down considerably, the price of crude oil continues to remain high. According to the Petroleum Planning and Analysis Cell (PPAC) which comes under the Ministry of Petroleum and Natural Gas, the price of the Indian basket of crude oil was at $ 113.65 per barrel (bbl) on September 11. The more popular Brent Crude is at $115.44 per barrel as I write this.
The high price of crude oil has led to huge losses for the oil marketing companies in India as they continue to sell petrol, diesel, kerosene and cooking gas at a loss. The oil minister recently said that if the situation continues the companies will end up with losses amounting to Rs 2,00,000 crore during the course of the year.
So why do oil prices continue to remain high?
The immediate reason is the tension in the Middle East and the threat of war between Iran and Israel. Hillary Clinton, the US Secretary of State, recently said that the United States would not set any deadline for the ongoing negotiations with Iran. This hasn’t gone down terribly well with Israel. Reacting to this Benjamin Netanyahu, the Prime Minister of Israel said “the world tells Israel, wait, there’s still time, and I say, ‘Wait for what, wait until when? Those in the international community who refuse to put a red line before Iran don’t have the moral right to place a red light before Israel.” (Source:
Iran does not recognize Israel as a nation. This has led to countries buying up more oil than they need and building stocks to take care of this geopolitical risk. “
In the recent period, since the start of 2012, the increase in stocks has been substantial, i.e. 2 to 3 million barrels per day. These are probably precautionary stocks linked to geopolitical risks,” writes Patrick Artus of Flash Economics in a recent report titled Why is the oil price not falling?
At the same time the United States is pushing nations across the world to not source their oil from Iran, which is the second largest producer of oil within the Organisation of Petroleum Exporting Countries (Opec).
What also is happening is that Opec which is an oil cartel, has adjusted its production as per demand. Saudi Arabia which is the biggest producer of oil within OPEC has an active role to play in this. “This adjustment in the supply of oil mainly takes place via changes in Saudi Arabian production:this country keeps its production just above 10 million barrels/day to avoid the excess supply that would appear if it produced at full capacity (13 million barrels/day,” writes Artus.
If all this wasn’t enough gradually the realisation is setting in that some of the biggest oil producing regions in the world are beyond their peaks. As Puru Saxena, a Hong Kong based hedge fund manager writes in a column “it is important to realise that several oil producing regions are already past their peak flow rates and have entered an irreversible decline. For instance, it is no secret that the North Sea, Mexico, Indonesia and a host of other areas are past their prime.”
All eyes are hence now on the Opec nations. The twelve nations in the cartel currently claim to have around 81.3% of the world’s oil reserves. The trouble is that this has never been independently verified. As Kurt Cobb, the author of Prelude, a thriller based around oil puts it in a recent column on “Opec reserves are simply self-reported by each country. Essentially, Opec’s members are asking us to take their word for it. But should we?”
Saxena clearly doesn’t believe that Opec countries, including Saudi Arabia, have the kind of reserves they claim to. “Given the fact that the vast majority of Saudi Arabia’s super-giant oil fields are extremely old, one has to wonder whether the nation is capable of boosting production…We are of the view that Saudi Arabia has grossly overstated its oil reserves and it is extremely unlikely that the nation has 270 billion barrels of petroleum. After all, the Saudi reserves have never been audited and a recent report by WikiLeaks suggests that the Saudis have inflated their oil bounty by 40%,” he writes.
This is something that Cobb backs up with more data. “Another piece of evidence that casts doubt on Opec members’ reserve claims came to light in 2005. That year Petroleum Intelligence Weekly, an industry newsletter with worldwide reach, obtained internal documents from the state-owned Kuwait Oil Co. The documents revealed that Kuwaiti reserves were only half the official number, 48 billion barrels versus 99 billion,” he writes. “In 2004 Royal Dutch Shell had to lower its reserves number by 20 percent, a huge and costly blunder for such a sophisticated company. If Shell can bungle its reserves estimate, then how much more likely are OPEC countries which are subject to virtually no public scrutiny to bungle or perhaps manipulate theirs,” adds.
Given these reasons the world cannot produce more crude oil than it is currently producing. The production of oil has remained between 71-76million barrels per day since 2005. “When you take into account the ongoing depletion in the world’s existing oil fields, it becomes clear that the world is heading into an epic energy crunch,” feels Saxena.
In these circumstances where the feeling is that the world does not have as much oil as is claimed, the price of oil is likely to continue to remain high. India’s Rs 2,00,000crore problem can only get bigger.
The article originally appeared in the Daily News and Analysis (DNA) on September 14, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])