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08/22/2002

Oil Update

Every few months it’s worth updating the world oil scene,
particularly as war with major producer Iraq seems inevitable.
Following are some pertinent current facts.

--The U.S. consumes up to 20 million barrels per day (hereafter,
‘mmbd’) of the world’s total consumption of 76 mmbd. The
International Energy Agency is forecasting a slight increase to 77
mmbd in 2003, based on lower prices than today and moderate
economic growth worldwide.

--The U.S. has only 3% of the world’s known reserves of oil,
compared with 60-65% in the Persian Gulf. Saudi Arabia, alone,
sits on top of 25% of the world’s proven reserves.

--Knowing this, it is hard to escape the fact that the United States
will continue to import a large portion of its crude, currently to
the tune of 12 mmbd, until our nation develops more alternative
sources of fuel, and/or takes advantage of known reserves such
as the Arctic National Wildlife Refuge.

--Under existing policy, the U.S. could be importing 15 mmbd
within 10 years.

--Oil expert Daniel Yergin: “The first principle of energy
security is diversification.” [Patrick Tyler / NY Times]

--Of the world’s 76 mmbd consumption, OPEC currently
produces about 30% (or, put another way, its market share is
30%). This is for the “OPEC 10.” When you include OPEC
member Iraq, OPEC’s share is closer to 33%.

--OPEC (ex-Iraq), currently has production quotas in place of
21.7 mmbd, but it has been producing in the neighborhood of
22.8 – 23.5, i.e., it’s been cheating on its quotas, a fact that the
high prices of today, in the $29 range, encourage. This also
means, however, that non-OPEC is increasing, a worrisome
thought for OPEC ministers.

--Despite the above, Saudi Arabia remains the “Central Bank” of
the oil market, because it can provide liquidity in tough times, or
take away the spigot. Today, Saudi Arabia is producing at a rate
of about 7.4 mmbd. Just over a year ago, though, it was closer to
8.7 mmbd. Saudi Arabia has over 3 mmbd excess production
capacity, which represents its leverage over the world
community. The only other OPEC nations with excess capacity
are Kuwait, UAE and Venezuela, but regarding the latter, I’d say
this is highly suspect, since Venezuela’s energy infrastructure is
decaying by the day and there is zero money in the national
coffers to pay for new plant and equipment.

--Saudi Arabia supplies the U.S. with 14% of its imports, 1.7
mmbd.

--The U.S. was importing up to 1 mmbd from Iraq (which has the
second largest oil reserves in the world behind S.A.), but U.S. oil
companies are dropping out because Baghdad has been
demanding kickbacks, to the tune of 20-50 cents per barrel, plus
the U.N. is cracking down on how oil consumers purchase Iraqi
crude. Last year, Iraq represented about 8% of U.S. imports.
Today, the U.S. imports only 100,000-200,000 barrels from Iraq.

--Many in the U.S. can’t understand why we need to import
anything from Iraq. [I’m not taking sides in this debate for the
purposes of this article.] One reason is that the U.S. was
participating in Iraq’s oil-for-food program, proceeds of which
were to buy food and medicine, as well as pay for the rebuilding
of Iraq’s infrastructure.

--Baghdad has been abusing U.N. sanctions and restrictions to
the tune of $1.8 billion a year.

--When looking at world consumption and the role of the global
economy, keep in mind that while the U.S. may consume 20
mmbd, Asia’s figure is about 21 mmbd.

--The U.S. has a Strategic Petroleum Reserve that currently has
in excess of 580 mm barrels. Day by day the government is
increasing it, with an eventual goal of filling it to its current
capacity, 700 mm barrels. One way to look at this latter figure is
to divide it by the 12 mm barrels we import each day and you
come up with a figure of roughly 60 days worth of supply. In
other words, if there was a massive disruption in world oil
supplies and the U.S. didn’t receive a drop, even from our
friends, the reserve could take care of our normal needs for two
months. That’s obviously an extreme example, but it does show
the importance of it. However what most folks writing articles
on the Strategic Petroleum Reserve fail to take into consideration
is the fact that, technically, the U.S. can only draw out a
maximum of 4 mmbd just due to the logistics of the reserve. So
now you have a different situation. If all the OPEC gulf states
shut us off (not likely, but still a threat), the reserves would not
be sufficient to make up the difference. The issue would then be
could we go elsewhere?

--Russia is one possibility, but even though this nation is now
producing at a rate equal to Saudi Arabia, it is at full capacity
and may not be able to help us much until the country modernizes
its production facilities. Down the road, however, Russia will be
an increasingly critical energy ally.

--The # of miles driven per vehicle is up 20% since 1973 and the
# of vehicles on the road in America is up 50% since 1970. The
average miles per gallon was 11.9 in ’73 and is only 16.9 today
(basically unchanged in the last ten years).

--Those looking ahead to winter should know that the U.S.
consumes ’s of the developed world’s heating oil. Start
chopping wood.

Sources:

Colum Lynch / Washington Post
Reuters
Wall Street Journal
David Buchan / Financial Times
J. Robinson West / Washington Post
Patrick Tyler / New York Times
Richard Stevenson / New York Times
Stanley Reed / Business Week
Alex Lawler / Bloomberg
Toby Shelley / Financial Times

Brian Trumbore

Next Hott Spotts September 5.


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-08/22/2002-      
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Hot Spots

08/22/2002

Oil Update

Every few months it’s worth updating the world oil scene,
particularly as war with major producer Iraq seems inevitable.
Following are some pertinent current facts.

--The U.S. consumes up to 20 million barrels per day (hereafter,
‘mmbd’) of the world’s total consumption of 76 mmbd. The
International Energy Agency is forecasting a slight increase to 77
mmbd in 2003, based on lower prices than today and moderate
economic growth worldwide.

--The U.S. has only 3% of the world’s known reserves of oil,
compared with 60-65% in the Persian Gulf. Saudi Arabia, alone,
sits on top of 25% of the world’s proven reserves.

--Knowing this, it is hard to escape the fact that the United States
will continue to import a large portion of its crude, currently to
the tune of 12 mmbd, until our nation develops more alternative
sources of fuel, and/or takes advantage of known reserves such
as the Arctic National Wildlife Refuge.

--Under existing policy, the U.S. could be importing 15 mmbd
within 10 years.

--Oil expert Daniel Yergin: “The first principle of energy
security is diversification.” [Patrick Tyler / NY Times]

--Of the world’s 76 mmbd consumption, OPEC currently
produces about 30% (or, put another way, its market share is
30%). This is for the “OPEC 10.” When you include OPEC
member Iraq, OPEC’s share is closer to 33%.

--OPEC (ex-Iraq), currently has production quotas in place of
21.7 mmbd, but it has been producing in the neighborhood of
22.8 – 23.5, i.e., it’s been cheating on its quotas, a fact that the
high prices of today, in the $29 range, encourage. This also
means, however, that non-OPEC is increasing, a worrisome
thought for OPEC ministers.

--Despite the above, Saudi Arabia remains the “Central Bank” of
the oil market, because it can provide liquidity in tough times, or
take away the spigot. Today, Saudi Arabia is producing at a rate
of about 7.4 mmbd. Just over a year ago, though, it was closer to
8.7 mmbd. Saudi Arabia has over 3 mmbd excess production
capacity, which represents its leverage over the world
community. The only other OPEC nations with excess capacity
are Kuwait, UAE and Venezuela, but regarding the latter, I’d say
this is highly suspect, since Venezuela’s energy infrastructure is
decaying by the day and there is zero money in the national
coffers to pay for new plant and equipment.

--Saudi Arabia supplies the U.S. with 14% of its imports, 1.7
mmbd.

--The U.S. was importing up to 1 mmbd from Iraq (which has the
second largest oil reserves in the world behind S.A.), but U.S. oil
companies are dropping out because Baghdad has been
demanding kickbacks, to the tune of 20-50 cents per barrel, plus
the U.N. is cracking down on how oil consumers purchase Iraqi
crude. Last year, Iraq represented about 8% of U.S. imports.
Today, the U.S. imports only 100,000-200,000 barrels from Iraq.

--Many in the U.S. can’t understand why we need to import
anything from Iraq. [I’m not taking sides in this debate for the
purposes of this article.] One reason is that the U.S. was
participating in Iraq’s oil-for-food program, proceeds of which
were to buy food and medicine, as well as pay for the rebuilding
of Iraq’s infrastructure.

--Baghdad has been abusing U.N. sanctions and restrictions to
the tune of $1.8 billion a year.

--When looking at world consumption and the role of the global
economy, keep in mind that while the U.S. may consume 20
mmbd, Asia’s figure is about 21 mmbd.

--The U.S. has a Strategic Petroleum Reserve that currently has
in excess of 580 mm barrels. Day by day the government is
increasing it, with an eventual goal of filling it to its current
capacity, 700 mm barrels. One way to look at this latter figure is
to divide it by the 12 mm barrels we import each day and you
come up with a figure of roughly 60 days worth of supply. In
other words, if there was a massive disruption in world oil
supplies and the U.S. didn’t receive a drop, even from our
friends, the reserve could take care of our normal needs for two
months. That’s obviously an extreme example, but it does show
the importance of it. However what most folks writing articles
on the Strategic Petroleum Reserve fail to take into consideration
is the fact that, technically, the U.S. can only draw out a
maximum of 4 mmbd just due to the logistics of the reserve. So
now you have a different situation. If all the OPEC gulf states
shut us off (not likely, but still a threat), the reserves would not
be sufficient to make up the difference. The issue would then be
could we go elsewhere?

--Russia is one possibility, but even though this nation is now
producing at a rate equal to Saudi Arabia, it is at full capacity
and may not be able to help us much until the country modernizes
its production facilities. Down the road, however, Russia will be
an increasingly critical energy ally.

--The # of miles driven per vehicle is up 20% since 1973 and the
# of vehicles on the road in America is up 50% since 1970. The
average miles per gallon was 11.9 in ’73 and is only 16.9 today
(basically unchanged in the last ten years).

--Those looking ahead to winter should know that the U.S.
consumes ’s of the developed world’s heating oil. Start
chopping wood.

Sources:

Colum Lynch / Washington Post
Reuters
Wall Street Journal
David Buchan / Financial Times
J. Robinson West / Washington Post
Patrick Tyler / New York Times
Richard Stevenson / New York Times
Stanley Reed / Business Week
Alex Lawler / Bloomberg
Toby Shelley / Financial Times

Brian Trumbore

Next Hott Spotts September 5.