oil update

I haven’t posted on this topic for a while. Did I forget about it?

No. The worlds oil supply situation is still deeply disturbing, and I am still researching it actively – as well as continuing my work on a mitigation project that could prove useful in future.

So where are we now?

• The worlds major oil fields are starting to decline at a far faster rate than had been hoped for. Cantarell and the North Sea are both declining at rates greater than even the worst case estimates (over 10% in each caes). Burgan is also in decline. Kashagan has been hit by rapidly escalating costs and a series of delays that threaten the whole project.
• Whilst new discoveries have been made (like Jack 2), most are extremely complex and difficult to extract. This is not a simple matter of economics where increasing the budget of the project can magically make it happen. A big factor now is the lack of skilled engineers. Nobody has been going into oil engineering for many years, partly due to the general decline in engineering and partly because it’s now seen as dirty and polluting work. The long months away from home in foreign countries doesn’t help either. The skills situation is getting so severe that old engineers are being called out of retirement and projects are queuing up.
• Not all the new oil being discovered can be bought by us in the West. Increasingly the countries that own it want to use it for their own development instead of selling it to us. China has been using its vast reserves of dollars to buy exclusive access to new fields like Yadavaran.

But it’s not all bad news. Russia and a few other places like Angola will probably increase production for a while. I’d be surprised if they can do anything but offset the declines elsewhere, seeing as how world production has been flat since 2004. Still, it does buy time.

So what do I see in my crystal ball? Difficult to say. There are so many variables right now anything could happen. I think we’ll see increasing volatility in crude prices, with more and more swings between highs and lows. I think this summer we will break $70 again, maybe even $80 – demand usually peaks in summer anyway and in the same way that the Israel/Lebanon war put an upward pressure on prices, this summer US/Iranian tension will likely do the same. Bush says he won’t invade Iran but nobody believes him, and Iran is far more important as an oil producer than Israel and Lebanon are.

The chances of minor oil shocks are also increasing fast. One of the unfortunate things about the chaos in Iraq is that people are (apparently) learning how to blow up oil refineries. Refineries are extremely complex, and as a result they tend to be rare but high throughput. Disabling even 3 or 4 refineries simultaneously – especially if in the same geographic area – would immediately send petroleum prices in that region through the roof. Attempts at destroying refineries have already been made in Saudi Arabia and documentation for how to achieve it is now said to be circulating on the net.

That said, short of some major disaster or world event, I don’t think we’ll start seeing serious endemic supply problems until past 2010. 2008 and 2009 will probably be expensive but only a serious problem for people who are already financially stretched thing and are absolutely unable to reduce their gasoline consumption.