Drowning in Oil...

I don't really get articles like this. I've certainly seen alot worse, but my two main points of contention are: (1) OPEC has some reason to worry and (2) we are awash in oil. Now maybe I'm oversimplifying and misrepresenting the intent of the article, but I keep reading items that seem to assume, or at the very least imply these two items and again, I just don't really get it.




The Globe and Mail: Oil Supplies and their Growth Towers.

Such prophecies are hasty, although that’s not to say the legendary cartel isn’t nervous about more barrels coming out of the ground. Most OPEC members are more worried about elephant fields being drilled in Iraq than they are by the distant din of fracking operations in the U.S.

New production from brittle, oil-bearing rocks in North America – otherwise known as light, tight oil – has been impressive. Yet that’s not all. A wider glance at the world of oil reveals a lot more new barrels coming to market. Other regions are busy pumping up capacity too – for instance, the Canadian oil sands and Iraq are notable for their scale.

To the first point. Should OPEC be worried? I simply don't understand how we could even imagine OPEC being worried. Now this graph isn't OPEC specific, but it does prove a point. When was there a better time to be an oil exporter? I included the Former Soviet Union (FSSU, had the data set and not in OPEC), Saudi Arabia (KSA), the Middle East at large (Including KSA), and the United States. This is a gross simplification of money flows but I do think it gets the point across.

I used EIA data for total liquids production and consumption to determine a net export value. I multiplied that by the average annual oil price (WTI for the US and Brent for the other three) to obtain an estimation of the value of their net exports. These numbers are on a daily basis:

Is it time for Saudi Arabia and their fellow exporters to worry? They are making way more money then ever before. In 2012 almost $1 Billion per day. PER DAY! Compare that with their measly sub $100 millions per day in the 90's. We'll speculate at what might be happening with their mature super giant fields in a later post, but it is quite plausible that their production costs are rising. But it''s really hard to imagine this gross revenue not far out pacing those costs. Meanwhile, The Americans (who are quick to congratulate themselves on their tight expensive oil), are paying out (in this simplified version of events) in excess of $500 million per day to support their oil consumption habits. It's probably pretty safe to assume that the average cost of their new found barrels of oil certainly out pace KSA or FSSU's barrels. So again, why would countries like Saudi Arabia be worried?

I keep harking back to this same graph but with all of these new sources of oil, why is there no material increase in crude consumption?

This article and many others speak of oil as if all sources are created equal. They speak of the amazing production rates of tight oil, the production finally being realized in Iraq, and the huge gains in production from our Oil Sands. But, if we're getting huge gains in Crude from these other sources (which we surely are) why isn't that showing up in the data? Clearly, these increases are being offset by declining production somewhere else. So a story about new oil sources claiming, or at least hinting, at a new age of oil supply (where even OPEC is a bit worried) that doesn't talk about the huge run up in prices and the stagnating production of crude just seems woefully incomplete.

Here's another story that I've seen alot recently. This particular graph comes from a Business Insider story titled "15 charts that should terrify Saudi Arabia":

Anyway, I followed the graph back to Pacifica's site.  The source they refer to for KSA's break even price is the Institute of International Finance. It appears that the IIF simply takes their projected budget, takes their traditional barrel of oil contribution to government revenue, and applies some simple math. Now, I get the logic. But it seems like a stretch to assume that the budget comes before consideration of the price of oil. Is it not more likely that they Saudi's are saying "look at how much revenue we've got to play around with, lets spend a bunch of it"? I don't know, perhaps I'm way off.

Upon closer inspection you'll notice the huge gap in crude oil production. This isn't, not significant... yeah, that works. Plus, again, why would the Saudi's worry? They are consuming more and more oil, their production levels have stagnated (which raises a whole host of possibilities that I'll get to in a later post), yet are earning way more money in aggregate on their exports then ever before. And all of this while the developed world muddles through somewhere between stagnation and a muted recovery.

What more could the Saudi's and any other exporting nation have hoped for?