A Crude Shock
Sydney Morning Herald
Saturday May 22, 2004
Get used to those high petrol prices, writes Brian Robins. The oil situation is bad, and the outlook is worse.
AS THE crude oil price holds above $US40 ($57.50) a barrel, the Organisation for Petroleum Exporting Countries is expected to signal an increase in output this weekend. But don't expect much relief at the petrol bowser, with the price likely to hold around $1 a litre for quite a while.
``We don't see petrol prices retreating from these levels for some time," says Ron Bowden of the Service Station Association. ``The days of cheaper prices are now over.
``We've caught up with the rest of the world. Seeing petrol prices above $1 a litre will be the order of the day."
Terrorist attacks on oil production facilities in Iraq and Saudi Arabia have led to a spike in oil prices over the past few weeks, along with surging oil demand in the US with the start of the (northern) summer driving season, as Americans fill up the tank and take the family for their summer break.
Hurt by the slide in the US dollar against major currencies last year, which made it harder for OPEC countries to pay for imports from Europe and Japan, OPEC producers took advantage of strong global oil demand to push oil prices up to the $US35 a barrel level late last year, from about $US25 a barrel.
The three major economies Europe, North America and finally Japan are all enjoying strong economic growth, which is pushing up oil demand, with the price following.
And then there is China, which is soaking up massive volumes of oil. Its oil imports soared 35.7 per cent in the first three months of this year alone, according to the Chinese Government, well up from the 31 per cent rise seen in all of last year.
OPEC output is running at more than 25 million barrels a day, well ahead of its supposed production level of 23.5 million barrels a day. This weekend, OPEC is likely to agree to raise its supposed output to 25 million barrels a day, although, in reality, output is likely to exceed this.
``[The oil price] won't stay above $40 a barrel for much longer," argues David Thurtell, a senior commodity strategist with the Commonwealth Bank. ``OPEC is moving to increase production. If they raise the quota from 23.5 million barrels a day to 25 million barrels, it won't mean anything, because OPEC is already producing at 25.3 million barrels a day. My view is that they will supply over the new quota, to say 26.75 million barrels a day."
Still, the high oil price is bad news for the economy, since it acts as an automatic tax on consumer spending. ``The high oil price and petrol price has the effect of taking a little bit off economic growth. Ballpark, a quarter of a percentage point off growth," says Melinda Cilento, a Business Council of Australia economist.
OPEC cannot lift oil output by as much as is commonly estimated because the steady increase in demand is straining capacity. ``OPEC can manage this market to an extent, but spare capacity is a lot less than it was," says Scott Gilchrist, an analyst with the fund manager Platinum Capital. ``Before the [1991] Gulf war, Saudi Arabia's spare capacity was 6 million barrels a day. Now it is a lot less."
Recent data puts the Saudi reserve capacity at 2 million barrels a day, enough to ease the present shortage but, as demand rises, its dwindling capacity is a cause for concern.
Saudi Arabia has protected the world oil market from massive price swings over the past few years, especially as exports from Iraq have been constrained. However, the recent killing of five foreigners working on its oilfields made it clear that it, too, is faced with internal dissent which could disrupt supply. ``These terrorists have added more than $US5 [a barrel] to the oil price," says Thurtell. ``When is that going to go away? You tell me.
``If Osama bin Laden gives himself up, that risk premium may go away."ACCURATE figures are hard to come by, but no giant oilfields have been discovered in more than 50 years. The last big oilfields were in the North Sea and Alaska, and these were found more than 30 years ago.
Newer oilfields, such as Ferdow and Azeagedan in the Caspian Sea, have recoverable reserves of only about 9 billion barrels each equal to about four months of global demand, according to Gilchrist.
In Australia, the Gippsland Basin in Bass Strait, which gave the country extra breathing room as motoring took off in the 1960s and '70s, is a shadow of its former self. Output peaked at 500,000 barrels a day in 1985. This year, its output is forecast to fall to 100,000 barrels a day, down another 15 per cent from last year.
Australia has plenty of gas, but not much oil, and unless we find substantially more soon the oil import bill will begin to soar. Bass Strait oil production is now overshadowed by oil produced from fields off the north-west of Australia, but the adverse trend remains.
Woodside Petroleum spent $US50 million drilling a deep well in the Great Australian Bight last year looking for oil but it was a failure. Even so, other explorers are planning more deepwater drilling off the west coast of Tasmania in the Sorrell Basin over the next 18 months or so and even off Sydney, while explorers are being enticed to drill at depths of up to 4000 metres in the Bremer Basin off the south-west of Western Australia. All these wells are wildcats and the odds of finding economic reserves of oil are remote, at best.
Globally, half of all crude oil production comes from 120 oilfields, with three-quarters of this coming from oilfields with an average age of more than 55 years. ``The easy oil era in Saudi Arabia is either nearly over, or over," a US investment banker, Matthew Simmons, told a conference on Saudi Arabia's energy future earlier this year. ``The next generation of Saudi oil certainly seems to be harder to extract."
Simmons has achieved considerable notoriety in oil industry circles over the past few years after a lengthy and comprehensive review of Saudi Arabia's oil reserves led to the conclusion that it will be harder for it to continue to play the cheap, swinging supplier to the world oil market.
New technology has extended the life of its oilfields, Simmons argues in a book to be published soon, although these gains could have largely run their course.
If stability returns to Iraq, it might be able to pump more oil which will help keep a lid on prices, although this could be some years off, since it needs to spend heavily to bring its oil facilities up to date.
Output at the big old oilfields might be strong but it continues to decline and new oil discoveries are barely keeping ahead of consumption.
The world's largest oilfields are all in unstable countries Iraq, Saudi Arabia, Venezuela, Nigeria and Indonesia where there is a continuing threat of disruptions at a time of tight supply. ``We think oil prices will remain high," says Gilchrist, noting that there is some spare capacity around the world as long as no supply disruptions occur.
Higher prices will lead to more exploration, although any new finds will be higher-cost, as all the low-cost oil has been found.
``There are concerns about how much oil is left," says Thurtell. ``There have been no significant discoveries for a long, long time. The longer prices stay high, the more the incentive to explore and develop new reserves.
``On the demand side, people don't stand still either. Hybrid vehicles over the next few years will become really popular. Some of the data shows that they get 100 kilometres for five litres of petrol; the average sedan may need 10 litres."
And what of the future for four-wheel drives, the new-age gas guzzlers? ``You would have to see a change out of high-consumption vehicles such as SUVs which are heavy on the gas, and it won't take long for car prices to reflect the fact that they will go out of favour," says the Service Station Association's Bowden.
© 2004 Sydney Morning Herald