OPEC says, ‘Don’t Count on Us’ for More Oil Supply

The results of OPEC’s latest meeting to set oil production quotas were announced this morning. Instead of production targets for individual countries, a group production ceiling of 30 million barrels a day was set. This amount is a bit less than OPEC produced in November 2011 (actual 30.367 mbd), according to its reckoning, and less than it would have produced most of 2011, if Libyan production had stayed on line, based on the amounts shown in its November Oil Market Report.

A recent history of oil production from the November Oil Market Report, both for OPEC and in total, is shown in Figure 1.

Figure 1. Recent oil production for World and for OPEC, according to OPEC November Oil Market Report.

According to a Platts report of the meeting, Venezuelan Oil Minister Rafael Ramirez told reporters, “We are going to reduce the level of production of each country to make space for Libya.” That is not what people want to hear–Brent oil price is still over $100 barrel, even with what seems to be record production for both the world and OPEC, based on Figure 1.

The same Platts report also says, “OPEC on Tuesday said it expected demand for OPEC crude next year to average 30.09 million b/d.” Thus, the new production cap is slightly less than what OPEC sees as demand going forward.

It should be noted that the new limit includes Iraq in addition to the “regular” OPEC countries. Thus, the agreement says that if Iraq increases its production, other OPEC countries will reduce their production to keep total production to 30 million barrels a day.  Continue reading

Pipeline changes to fix WTI/Brent spread are likely to add new problems

For many years, Brent oil (a European grade) and West Texas Intermediate (WTI) oil, a US grade, sold at close to the same price. Starting in January 2011, WTI price dropped below Brent, at times by more than 20%.

When the price of WTI dropped, the prices of quite a few other grades of oil (especially in the Midwest, but perhaps elsewhere) were affected as well. To get an idea of how much the overall impact was, I compared the price refiners pay for oil to that of Brent and WTI (Figure 1).

Figure 1. Average refiners acquisition cost, Brent oil price, and WTI oil price, based on EIA data.

I found that the drop in the prices refiners pay for crude oil prices is much more akin to the drop a person would expect if 40% of crude were affected, than the small drop one would expect if only WTI itself were affected. The price change during 2011 did not seem to be due to changes in average viscosity or in sulfur content either.

Some of the types of crude that have been hit by lower prices are those from the Alberta. Recently, there have been proposals by Canadian companies to try to fix the problem. Enbridge announced that it is buying a 50% stake in the Seaway pipeline, and will reverse its direction, so that it will carry crude oil southward, from Cushing to the Gulf, instead of northward, as soon as the second quarter of 2012. In addition, TransCanada has announced the it wants to build the segment of the Keystone XL pipeline from Cushing to the Gulf, possibly starting as soon as January 2012.

The question now is what impact the proposed pipelines will have. Will they even out the Brent/WTI price disparity, and, at the same time, cause the prices of other crudes, such as Canadian and Bakken crudes, to rise as well? Or will the pipeline adjustments fix only part of the problem, and add new problems at the same time? In my view, the latter seems more likely, for reasons I discuss in this post.

For those who are interested, I wrote a post in February giving more background, which can be found here.
Continue reading

Kidding ourselves about future MENA oil production

Recently, the International Energy Agency’s Chief Economist Fatih Birol was quoted as saying,

In the next 10 years, more than 90% of the growth in global oil production needs to come from MENA [Middle East and North African] countries. There are major risks if this investment doesn’t come in a timely manner.

While I agree that we need more oil production, I think we are kidding ourselves if we expect that 90% of the needed growth in global oil production will come from MENA countries. In this post, I will explain seven reasons why I think we are kidding ourselves.

Reason 1. MENA’s oil production, as a percentage of world oil production, has not increased since the 1970s, suggesting that MENA really cannot easily ramp up production.

Figure 1. Middle East and North Africa oil production as percentage of world oil production. Figure also shows oil price in 2010 dollars. Amounts are from BP Statistical Report. Oil includes NGL; oil price comparable to Brent.

MENA’s oil production amounted to more that 40% of the world’s oil production back in  the mid-1970s, but is now down to 36% of world oil supply. It is hard to see anything that looks like an upward trend in MENA’s share of world oil supply, even when high prices hit. OPEC talks big, but its actions do not correspond to what it says. Continue reading

Drilling Down: Tainter and Patzek tell the energy-complexity story

Joseph Tainter and Tadeusz Patzek are authors of a soon-to-be-released book called Drilling Down: The Gulf Oil Debacle and Our Energy Dilemma. This book is part of Charles Hall’s Briefs in Energy series with the publisher Springer. An earlier book in this series was The Limits to Growth Revisited, by Ugo Bardi.

The new book, Drilling Down, is not simply the story of the Gulf oil spill (although it does tell this story, quite well). Tainter and Patzek use the story of the Gulf oil spill as the background for discussing the energy-complexity spiral, and its relationship to this accident.

The energy-complexity spiral occurs because the availability of abundant, inexpensive energy permits increased complexity. Complexity has the advantage of allowing society to solve more problems, but it has the disadvantage of being more costly–that is requiring more energy for its creation. The need for more energy (and the fact that Energy Return on Energy Investment (EROEI) is declining) leads to a need for more complexity to obtain this additional energy, assuring that the cycle continues. With growing complexity, there is an increased risk of accidents that can be expected because of the complex nature of the system, but which are hard for participants to foresee. Continue reading

IEO 2011: A Misleadingly Optimistic Energy Forecast by the EIA

The EIA published International Energy Outlook 2011 (IEO 2011) on September 19, showing energy projections to 2035. One summary stated, “Global Energy Use to Jump 53%, largely driven by strong demand from places like India and China.”

It seems to me that this estimate is misleadingly high. The EIA is placing too much emphasis on what demand would be, if the price were low enough. In fact, oil, natural gas, and coal are all getting more difficult (and expensive) to extract. Prices will need to be much higher than today to cover the cost of extraction plus taxes countries choose to levy on energy extraction. The required high energy prices are likely to lead to recessionary impacts, which in turn will cut back demand for energy products of all types.

We live in a finite world. While it is true that huge resources of oil, natural gas, and coal are still theoretically available, we are starting to reach practical limits regarding extraction at prices that do not lead to economic contraction. Continue reading