Another day, another oil dollar

New York Times oil read-around

The last couple of days have witnessed continued unrelenting increases in price levels for oil spot futures at the New York Mercantile Exchange. Today, test of the $53 mark has happened, just one week after $50 first was touched. See also Oil Prices Climb Over $52 a Barrel, time stamped 12:06 pm ET. To go along with the price run-up, the pages of the Times have been abuzz with stories on world oil.

In the Op-Ed section, the ever-insightful Thomas Friedman dispenses today some critique of the Bush Administration, along with unsolicited advice for the Arab countries. Hindsight is 20-20, Tom. Of course we should have tried to raise money for the public treasury post-911, instead of follow the Bush/Grover Norquist plan of drowning the public sector in the bathtub. For Bush/Norquist, 911 must have been a godsend in the quest to drown the government. The oil run-up only hastens this process.

In The Battle of the Pump, Friedman writes:

Of all the shortsighted policies of President Bush and Vice President Dick Cheney, none have been worse than their opposition to energy conservation and a gasoline tax. If we had imposed a new gasoline tax after 9/11, demand would have been dampened and gas today would probably still be $2 a gallon. But instead of the extra dollar going to Saudi Arabia - where it ends up with mullahs who build madrasas that preach intolerance - that dollar would have gone to our own Treasury to pay down our own deficit and finance our own schools. In fact, the Bush energy policy should be called No Mullah Left Behind...

There is plenty of support for the Friedman notions in the business pages:

Some Big Winners From Costly Oil
By MICHELLE WALLIN

DOHA, Qatar, Oct. 6 - The high price of oil is stoking an economic expansion in many petroleum-producing countries of the Persian Gulf that even persistent concerns about the turmoil in Iraq and the spread of terrorism have not managed to stifle...

Then there was a very intersting story on OPEC appearing last Sunday. It lays out how oil is in decline throughout the world, and underlines the notion that OPEC must be the linchpin for oil production growth over the next two decades. The question this article leaves me is, what happens if OPEC, specifically Saudi Arabia, is, contrary to assumptions implicit in the article, in decline too? This would be very, very serious. Near-term oil shocks could be a lot closer than anyone thinks.

Irrelevant? OPEC Is Sitting Pretty.
By JAD MOUAWAD; Published: October 3, 2004

PARIS — The signs of OPEC's supposed decline into irrelevance are all around.

Its share of world oil output, once 50 percent, is down to about one-third. It was caught unprepared by a prodigious run-up in demand this year. Nearly all its members are ignoring their production quotas and pumping all the oil they can. It lags behind non-OPEC oil producers in exploration and oilfield development. And it has seemed helpless to rein in prices that soared to record highs over $50 a barrel last week....

As the rest of the world has stepped up oil production to meet soaring demand this year, it has been exhausting reserves much faster than OPEC has. At present rates of production, the crude oil that has already been found outside OPEC will be consumed by about 2030 or so, when the five gulf countries will still have billions of barrels. Of course, production levels change, and some new oil is found each year to replace what is used - but lately, not very much.

Multinational oil companies are already worried. "As the absolute amount of energy provided by OPEC countries has grown, as well as OPEC's share of the total, voices of concern over security of supply have increased", said Lee R. Raymond, the chief executive of ExxonMobil, speaking at an industry conference in Vienna last month. "It will be difficult to calm these concerns"....

But the respite offered by Russia - and by new oil fields in neighboring Kazakhstan, the only big finds anywhere in the world in recent years - may prove short-lived. PFC Energy, a consulting firm, estimates that production in the former Soviet Union will peak at 14 million barrels a day around 2012 and then decline.

So the oil industry must inevitably turn to OPEC, according to Robert Ebel, the head of the energy program at the Center for Strategic and International Studies.

"Access to reserves, that's the name of the game", Mr. Ebel said. "You want to go where the reserves are. So you go to Russia, for example, but you always come back to the Persian Gulf, because that's where the reserves are"....

Now, though, the world is drinking oil like never before, and prices have risen far above its target range. Demand is forecast to increase by half over the next two decades, reaching some 115 million barrels a day by 2025, and many analysts say that OPEC has been slow to invest in new production to meet the demand. According to PFC Energy estimates, OPEC now pumps 8 billion more barrels of oil each year than it finds and develops.

That means that prices are likely to stay fairly high for a long time, according to Kevin Norrish, an analyst at Barclays Capital. Futures contracts for oil to be delivered in 2010 are trading now at $34.30 a barrel, or one-third more than when they began trading in March; that fact "is telling oil companies and OPEC that large amounts of investments are required", Mr. Norrish said. "It's a signal of underinvestment over the past decade. It's not a short-term issue".

And the speculators are definitely amped up, as was the worry at the recent G7 meeting of finance ministers. The problem is that when speculators begin to trade on the notion that oil will continue to be in shortage for a long, long time -- in the absence of adequate new supply and/or failure to conserve -- speculation will feed on itself and drive prices even higher than they should be driven. Hence, supply enhancement and conservation measures are recommended in the October 2 G-7 communiqué analyzed in Deep Blade Journal. Curiously, the Times did not see fit to publish a story on this communiqué that I can find in using the article search function. Meanwhile, they did today publish an interesting story about how these speculators think:

Just Another Day in the Pit as Oil Tops $52
By JONATHAN FUERBRINGER

At a few minutes before 11 a.m. yesterday, the crude oil pit on the floor of the New York Mercantile Exchange, the world's largest oil market, shifted into high gear. Traders frantically shouted and flashed their signals for buying and selling thousands of barrels of crude oil as the price leapt to a new high of $51.80....

Another reason some traders are more cautious, Mr. Hopkins said, is that this is a market that reacts strongly to news events.

"You tend,'' he said, "to pull back your positions when you are held hostage to news from Nigeria, Russia, Venezuela and the Middle East. You can be right on the oil fundamentals and get crushed by the headlines."

The war in Iraq; the uncertainty about the availability of oil supplies from Nigeria, Russia and Venezuela; and Hurricane Ivan are among the reasons cited for the rise in the price of oil. But there are other factors that have pushed oil higher and added to the volatility.

Among these is the large flow of money from hedge funds, many of them betting for months on higher oil prices. Data from the Commodity Futures Trading Commission show that oil bets from these kinds of speculators have been rising again in recent weeks and are back above their average for the year.

Moving along, the Times sometimes can surprise and issue basic truth:

Slow Learner on Energy-Efficiency Front
By JAD MOUAWAD; Published: October 5, 2004;

France produces only 3 percent of the two million barrels it consumes each day. This drilling operation is next to EuroDisney, near Paris.

The United States, land of gas-guzzling S.U.V.'s and air-conditioned McMansions, might do well to turn to the country some Americans love to hate for lessons on how to curb its reliance on imported oil: France.

Now that oil has reached roughly $50 a barrel and the world is coming to expect relatively high oil prices to last a long time, experts say that a rethinking of America's wasteful ways is once again an urgent undertaking.

I thought it interesting to review an article from early last spring. Note the oil price prediction along with some continuing good advice:

Average U.S. Gasoline Price at Pump Reaches Record High
By KENNETH N. GILPIN; Published: March 24, 2004

Passing the energy bill "may do something for gasoline prices in 2008 or 2009, but it will do nothing to help them now," said Philip K. Verleger, a visiting fellow at the Institute for International Economics in Washington.

"Long term, there is only one way to get energy prices down," he said, "and that is to use less."

Mr. Verleger said that over the balance of the year oil prices are likely to remain high, and could peak around $40 per barrel.

Finally, today a Republican saturation story attempts to distract the public from the essential truths of the current news. Bush needs a silver lining from the null findings in the Iraq WMD hunt. So let's blame Saddam, and acuse UN traitors of taking his largesse in oil-for-food corruption: Report Says Iraq Misused U.N. Oil Plan.