April 27, 2006
Oil Prices and Supply
James Hamilton has a contrarian view on the reason why oil prices are so high. There are two factors contributing to the problem.
The first is that about 340,000 barrels/day are still shut in as a result of Hurricanes Katrina and Rita. Further, it there is no plan to bring that production back on-line.
"By and large those production platforms that are out are not going to be put back because it's not economically desirable to reinvest to put those facilities back in place," Bodman told the House Energy and Commerce Committee during a hearing on the Energy Department's proposed 2007 budget.Bodman said the shut-in production platforms are mostly in old oil and gas fields close to shore.
"They tend to be depleted and it would not economically be viable to reinvest in to rebuild them and the companies haven't done that," he said.
On top of this there are about 470,000 barrels/day that are shut in due to unrest in Nigeria.
In short, current world production is below the peak attained last year and demand shows little signs of easing up. Despite the various conspiracy theories out there about how oil companies are manipulating the price, one significant component seems to be the decrease in supply.
Update: I decided the picture of world oil supply at Econbrowser (and from the Oil Drum) would show this problem quite nicely.
Iraq's average 2005 oil production was down about 900,000 barrels a day compared to its average production a few months prior to the onset of the war there.
While that fact might seem to additionally bolster the claim of this post (and it is odd it wasn't mentioned, IMO), the Qatari oil minister's recent comments belie the claim.
He asserted that you'd see $15 a barrel off the price immediately if the geopolitical saber rattling would dampen down. While he wasn't specific, it appears he was referring to the war drums pounding for Iran, and the effect that had on speculators' driving up the spot price of oil on such rumors and well-founded fears.
Back in the quaint days of merely $50-$60 a barrel oil, it was reported that a speculators' premium of some $10 to $15 per barrel existed in that price. Despite whatever issues there are with supply, it would be ignorant to ignore what is going on in the futures markets, qua futures markets.
For example, are we to imagine shortages of supply in gold and other commodities have all also come to pass at this exact time, leading to spikes in many of these commodities to record levels not seen for many years, or might there be something else going on that contributes to all of these spikes?
Posted by: sofla on May 2, 2006 04:08 PM