April 17, 2005
Global Security
The price of oil is of critical importance to today's world economy, given that oil is the largest internationally traded good, both in volume and value terms (creating what some analysts have called a "hydrocarbon economy"). In addition, the prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share. Finally, the price of oil is linked to some extent to the price of other fuels (even though oil is not fully substitutable for natural gas, coal, and electricity, particularly in the transportation sector). For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing and consuming countries.
There is a great deal of uncertainty about the size and availability of crude oil resources, particularly conventional resources, the adequacy of investment capital, and geopolitical trends. This work i a multistep process that began with estimating the amount of oil in place, based on the area's geology, without reference to how much it might cost to remove this oil. The second step is estimating the amount of technically recoverable oil, which takes into account the industry's current state of technology for extracting oil, without accounting for the potential cost to accomplish this. Finally, analysts overlay the technically-recoverable estimate with an economic analysis -- an estimate of economically recoverable oil. This analysis takes into account the quality and market value of oil, the costs of exploration and drilling, the financial costs of extracting and transporting the oil, and the financial rate of return expected at particular oil prices. The amount of economically recoverable oil resources from area 1002 depends strongly on the long-term market price of oil.
In 1956, geophysicist M. King Hubbert -- then working at the Shell research lab in Houston -- predicted that US oil production would reach its highest level in the early 1970s. Though roundly criticized by oil experts and economists, Hubbert's prediction came true in 1971. The hundred-year period during which most of the world's oil was discovered became known as Hubbert's peak.
Some analysts now believe that a peak in world oil production is now at hand. Eminent oil geologist Kenneth Deffeyes, for instance, predicted in 2001 that global oil production would peak sometime between 2004 and 2008. Pessimists argue that new exploration and production technologies won't help. While long-term solutions exist in the form of conservation and alternative energy sources, pessimists fear that they may not be enacted in time to evade short-term catastrophe.
The Energy Information Administration (EIA) is an independent statistical and analytical agency within the Department of Energy. It is charged with providing objective, timely, and relevant data, analysis, and projections for the use of Congress, the Administration, and the public. It does not take positions on policy issues, but produces data, analysis, and forecasts that are meant to assist policy makers in their energy policy deliberations. Because EIA has an element of statutory independence with respect to the analyses, its views are strictly those of EIA and should not be construed as representing those of the Department of Energy or the Administration. However, EIA's baseline projections on energy trends are widely used by government agencies, the private sector, and academia for their own energy analyses.
The EIA Annual Energy Outlook 2003 predicted business as usual through 2025, with possible peak production in 2037. The European Community in 2001 foresaw no problem through 2025. The CIA in 2002 anticipated a peak in 2025, though this was not widely reported. Although Hubbert's Peak did exibit logistic curve [bell curve] in the US, there is no geophysical or physical reason for production to follow a symetrical logistic curve in declining production.
In 2000 peak production years were estimated by EIA using a relatively simple algorithm. The peak production year estimates ranged from 2021 to 2112 across the 12 scenarios. For example, using the USGS mean (expected) resource base estimate (3,003 billion barrels) and an annual production growth rate of 2 percent (similar to the current rate), the estimated peak production year is 2037.
Since 1973 every upward spike in real oil prices has been followed by a jump in unemployment, or output gap. Some of these jumps seem much larger than can be accounted for by oil prices alone, and there appears not to be a symmetric macro response to downward oil price shocks. But this result is still impressive because most of these oil price shocks have been perceived as temporary. Presumably, the macroeconomic impact would have been even more powerful for price shocks that were perceived as permanent.
EIA's Annual Energy Outlook provides projections and analysis of domestic energy consumption, supply, prices, and energy-related carbon dioxide emissions through 2025. World oil prices are defined based on the average refiner acquisition cost of imported oil to the United States (IRAC). The IRAC price tends to be a few dollars less than the widely-cited West Texas Intermediate (WTI) spot price.
In November 1998 the Energy Information Administration released a forecast of World Oil Prices out to the year 2020. At that time, oil prices were some of the lowest since the early 1970's, and that even by 2020 we expect oil prices in real 1997 dollars to reach only $22.73. These projections are from the reference case of the Annual Energy Outlook 1999. The full document, including stand-alone and side cases, was released in mid-December. In current, or nominal, dollars (which include inflation) that $22.73 translates into $43.30 in 2020. All of our long-term forecasts are stated in terms on constant dollars, so that we can see trends across time. The prices shown here are imported refiner acquisition costs, rather than West Texas Intermediate. Domestic crude oil production is projected to continue its historic decline throughout the forecast, declining from 6.5 million barrels per day in 1997 to 5.0 million barrels per day in 2020. More than half of the decline is from falling Alaskan crude oil production. Alaska production is expected to decline rapidly--at 4.1 percent annually--as Prudhoe Bay and most other oil fields decline. The general trend in world oil prices was up, but the EIA thought it most likely at a gradual rate at best. High stock levels worldwide were forecast to restrain prices from moving up sharply, especially if anticipated increases in winter demand fail to materialize.
Annual Energy Outlook 2005 (AEO2005) is based on Federal and State laws and regulations in effect on October 31, 2004. The potential impacts of pending or proposed legislation, regulations, and standards— or of sections of legislation that have been enacted but that require funds or implementing regulations that have not been provided or specified—are not reflected in the projections. AEO2005 was released on the EIA website on February 11, 2005.
In the AEO2005 reference case, the annual average world oil price 1 increases from $27.73 per barrel (2003 dollars) in 2003 ($4.64 per million Btu) to $35.00 per barrel in 2004 ($5.86 per million Btu) and then declines to $25.00 per barrel in 2010 ($4.18 per million Btu) as new supplies enter the market. It then rises slowly to $30.31 per barrel in 2025 ($5.07 per million Btu). As recently as April 13, 2005 Guy F. Caruso, Administrator of the Energy Information Administration, was briefing these results.
But The EIA's Short-Term Energy Outlook – April 2005, released 07 April 2005, told a very different story. During the first quarter of 2005, West Texas Intermediate (WTI) crude oil near-month contract futures prices averaged $49.77 per barrel, rising nearly $14 per barrel over the 3-month period. Higher crude oil prices over this period reflected, in part, market expectations of robust world demand, limited increases in non-Organization of Petroleum Exporting Countries (OPEC) production, and uncertainty about crude oil supplies from continuing volatile situations in Iraq, Nigeria, and Venezuela. Traders and oil market analysts seemed focused on the latter part of 2005, projecting continued strong demand growth with very little spare production capacity available. Nevertheless, since their April 1st peak, crude oil prices tumbled more than 9 percent to $51.86 per barrel by April 12, 2005.
The average West Texas Intermediate (WTI) crude oil price for the first quarter of 2005 was $49.77 per barrel, approximately $14.50 per barrel higher than in the first quarter of 2004 and $1.10 per barrel above the first quarter 2005 projection in the previous Outlook. WTI prices are projected to remain above $50 per barrel for the rest of 2005 and 2006. Oil prices are likely to be sensitive to any incremental oil market tightness. Imbalances (real or perceived) in light product markets could cause light crude oil prices to increase to levels above the $55 per barrel average projected in the Outlook.
Several factors have contributed to the recent high crude oil prices and are likely to keep prices at or near present highs. First, worldwide petroleum demand growth is projected to remain robust, despite high oil prices, but is likely to moderate in response to slower Chinese growth, which exceeded 1 million barrels per day in 2004. Projections for 2005 and 2006 call for worldwide growth averaging 2.2 million barrels per day, or 2.6 percent, per year, down from the 3.4-percent growth in 2004. Chinese demand growth is projected to moderate to an average of 650 thousand barrels per day annually in 2005 and 2006. Second, expected growth in non-Organization of Petroleum Exporting Countries (OPEC) supplies is not expected to accommodate worldwide demand growth. Third, worldwide spare crude oil production capacity has recently diminished and is projected to remain low. Fourth, freight rates, although down from those in 2004, are projected to remain high in historical terms. Finally, geo-political risks, such as the continued insurgency in Iraq and political unrest in Nigeria and Venezuela, are expected to keep the uncertainty premium high.
EIA’s assessment of the outlook through the balance of 2005 expected markets to remain relatively tight. Particularly for gasoline supplies, refiners will need to be adept in matching expected strong demand through increased production, larger import volumes, and/or drawing upon inventories. For example, if refiners produce less gasoline in the near-term and rely more on inventories and imports to meet potentially robust gasoline demand, the stage could be set for a second wave of higher gasoline and crude oil prices later this summer. Conversely, if petroleum markets remain relatively balanced through the summer driving season, prices could remain relatively stable. Regardless, as of now, EIA does not foresee a sustained crude oil price below $50 per barrel in the near future.
In contrast to most other oil-price-spike episodes, this time the far futures price of oil -- that is, the price for contracts seven years out -- has also risen sharply. This correlation seems to indicate that the present oil price increase is not viewed as a purely temporary shock. It is virtually inevitable that shocks will result in some combination of higher inflation and higher unemployment for a time.
http://www.globalsecurity.org/military/intro/oil.htm