Current Situation & 2005 Projections

This past year we have seen how volatile the oil market has become as the world approaches peak oil production. But the recent softening of oil prices demonstrates that we have not yet peaked. What we are experiencing right now is a tight oil market. Production can still increase, but not by much and only with difficulty. The good news is that we are producing more oil than ever before. The bad news is that production is barely keeping up with consumption, and the decline is still ahead of us.
In this tight situation, anything which disrupts oil production around the globe has an effect on prices. This year oil prices were driven up by the triple whammy of the Iraq invasion, civil unrest leading to production disruption in Nigeria, and hurricanes in the Gulf. Production could not increase enough to cover all of those shortages. But now the hurricane season is long over, and Nigeria is back in business. Barring further disruptions – such as the horror of a 9.0 earthquake in the Indian Ocean – prices should remain soft for the short term.

2005 Energy Picture

In fact, oil prices might drop back below $20/barrel before 2005 is over – depending on circumstances. Several new large fields should come online this year, adding extra capacity. These are the last of the 500 million barrel mega fields, since none has been discovered in the past few years. Eighteen new mega projects are due to start producing this year, followed by eleven more is 2006. However, 2007 will see the opening of only three new projects, followed by three more in 2008. This will not keep up with declining production in older fields, much less the increase in demand.

ODAC has announced that world production is now seeing a 1 million barrel/day depletion rate. It remains to be seen whether the new production slated to come online this year and next will be sufficient to make up for that depletion rate. And should Ghawar collapse within the next year or two, the loss of production from this one field might cancel out all gains from new fields.

Increasing demand in China and India might also keep prices strong. Both countries are building strategic petroleum reserves. The additional demand of filling these reserves could account for all new production this year, driving prices higher. However, if prices climb high enough, these countries will likely suspend purchases for their strategic reserves, and might even open their reserves to help bring the price back down.

So for the next two years prices will tend to be soft, though they will remain volatile due to production disruptions caused by natural catastrophe, warfare and a host of other causes. In other words, we may have a cushion for the next couple years. But how are we going to use it? If we provoke supply disruptions, the price will bounce up. Once the disruption is over, prices will drop.

More at FTW

Dale Allen Pfeiffer