Oil Production Briefing Paper
Executive Summary
Oil prices are currently at record highs. Higher oil prices are often attributed to geo-political instability, refinery constraints, hurricanes, or any number of other reasons. While these factors may affect short term prices, the main reason for the upward trend in oil prices in recent years is that demand is exceeding supply.
Since 2002, oil production has been increased by 13%, to current levels of almost 86m barrels per day. But this increase in output has not kept oil prices low – in fact oil prices have increased four fold in US dollar terms over the same period. This runs counter to the free market economic model which suggests that lower prices should result when supply is increased, if demand is constant. Clearly demand has been outstripping supply, forcing the price up.
Recent statistics indicate that global oil production appears to be flat or declining:
- Global production of conventional oil has been in decline since the maximum recorded output of just over 74m barrels per day set in May 2005.
- Global production of liquids from all sources, including oil tar sands, gas-to-liquids, coal-to-liquids and bio-fuels has been flat since the maximum output of 86m barrels per day set in July 2006.
Growing internal demand within oil producing nations also appears to be accelerating the worsening supply situation.
It remains to be seen if demand growth and falling export levels can be countered by new oil projects coming on stream, and from other fuels sourced from oil sands and bio-fuel technology for example.
Close monitoring of oil production and oil export figures is suggested. In particular OPEC claims that they will bring 500,000 barrels per day of oil to the market later this year. Failure to achieve this would indicate a clear supply issue with the oil market, which will inevitably lead to higher oil prices for the foreseeable future, in the absence of any decrease in demand.
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Oil Price Trends
Denominated in either US Dollars or Euros, the price of oil has been trending upwards significantly since 2002. In US dollar terms, benchmark crude has more than quadrupled since 2002. Current oil prices are not far off the inflation adjusted all time highs from the 1970’s which are calculated as somewhere between $US90 and $US100 a barrel.
In the past, seasonal variations in demand, in particular the US “driving season”, have meant oil prices have traditionally peaked around August and September. If the seasonal pattern continues then we should shortly see a dip in oil prices in the last few months of 2007, followed by increasing prices in the first quarter of 2008. Average WTI monthly prices are shown in the chart below, sourced from the US Energy Information Administration (EIA).
Conventional Crude Oil Production Trend
Crude oil comprises most of the world’s current oil production. Crude oil production has been trending downwards slightly since mid 2005.
According to the latest figures from the Energy Information Administration (EIA), oil production for May 2007 was estimated at 73.06 million barrels per day.
This is 1.21 million barrels per day lower than the all time crude oil production of 74.27 million barrels per day reached in May 2005.
All Liquids Supply Trend
The term liquids refers to all forms of liquid fuels, including conventional, heavy, and extra heavy oil, oil shale, oil sands, natural gas liquids, lease condensates, gas-to-liquids, coal-to-liquids and biofuels.
There is some variation in the world liquids figures between the two main statistical agencies – the US based Energy Information Administration (EIA) and the Paris based International Energy Agency (IEA).
However, both sources agree that the highest ever production rate for all liquids was achieved in July 2006. The IEA calculated a value of 86.13 million barrels a day. The same agency calculates August 2007 production rates at 84.6 million barrels a day.
Oil Export Trends
While it is important to consider overall oil production volumes, for oil consuming countries such as New Zealand it is even more important to monitor the amount of oil that is being exported from oil producing countries.
As the internal economies of oil producing nations grow, there is less oil available for export. An example of this effect is demonstrated by OPEC member Indonesia, which is now a net importer of oil.
World Liquids Exports
Precise data on crude oil exports for all countries is not readily available. However a reasonable estimate can be derived by subtracting the consumption of oil products, refinery fuel and direct crude oil sales from liquids production in producer countries.
The chart below indicates a sharp drop in oil exports during May and June 2007.
OPEC Export Liquids
The Organisation of Petroleum Exporting Countries (OPEC) have traditionally been the “swing producer” of oil, able to quickly add additional supplies to the oil market. However, the following chart shows that exports from the OPEC countries have declined significantly since the all time peak of nearly 30m barrels per day in July 2006 to the current levels of 28.5m barrels per day.
Even so, the IEA estimates OPEC effective spare capacity at below 3 m b/d.
Recently OPEC announced that they will increase output from 1 November 2007 by 500,000 barrels per day. However, spot crude tanker rates remain very weak and are at multi-year lows, according to the IEA. This suggest lower export volumes of oil. For comparison, Very Large Crude Carriers (VLCC) rates from the Middle East to the US Gulf remained flat at $14 / tonne. This compares with rates of $25 / tonne at the end of August 2006; a busy period of chartering before OPEC cuts were implemented.
OPEC have also recently voiced concerns that any increase in output will be offset by non-OPEC countries producing 110,000 fewer barrels of oil per day than expected in the fourth quarter.
New Zealand Tui Project
The Tui-1 oil discovery was drilled by NZOG and partners in February 2003. Proven and probable reserves are estimated at more than 30 million barrels. If this estimate is correct, and all of the oil could be instantaneously extracted, Tui could supply global demand for 8.5 hours.
Production commenced on 30 July 2007, stabilising at 50,000 barrels a day. Within two years the flow rate is expected to decline to 10,000 barrels a day.
Oil from the Tui field is being sent to Australia for refining, and on-sold to the Asia-Pacific region.
References
Energy Information Administration (US) - Weekly Petroleum Status Report, published every Thursday NZT:
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html
International Energy Agency (France) – September Oil Market Report:
http://omrpublic.iea.org/currentissues/full.pdf
Charts courtesy Rembrandt Koppelaar and OilWatch Monthly:
http://www.theoildrum.com/tag/oilwatch