The foolish man seeks happiness in the distance; the wise grows it under his feet.
The time has come to discuss what we can expect from OPEC as it relates to our prosperity in the coming decade. After 2010, crude produced outside the cartel will plateau and gradually decline, so any growth in the conventional oil supply must come from OPEC.
OECD policy-makers and consumers must now understand that OPEC's short term policy on supply-side relief, which is not to provide any, is also their longer term policy. Do not count on OPEC to bail us out of the oil crunch. We must adjust our expectations to reflect reality, not our hopes and dreams.
Delusional expectations placed upon OPEC's ability and willingness to expand the oil supply are going to make our lives untenable within a few short years. Harmful price impacts are already happening now. For most citizens, future impacts will far outweigh questions about who the next president of the United States will be as things stand now. In the absence of a major and immediate policy shift in the United States that aims to substantially reduce our oil consumption, it will be OPEC, not our elected government or "Big Oil" companies, that sets the minimum (floor) prices for liquids fuels.
This week brings news that OPEC president Chakib Khelil "does not rule out oil prices reaching $200 a barrel, even though supply is adequate, because the market is driven by the dollar's slide."
[Khelil] added: "The prices are high due to the fact of the recession in the United Sattes and the economic crisis which has touched several countries, a situation which has an effect on the devaluation of the dollar, and therefore each time the dollar falls one percent, the price of the barrel rises by $4, and of course vice versa," he was quoted as saying in brief remarks to journalists on Sunday.
He added that: "If this (the dollar) strengthens by 10 percent, it is probable that (oil) prices will fall by 40 percent" [Note — to $71.35/barrel at today's price]
... "But I don't think that an increase in production would help lower prices, because there is a balance between supply and demand and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years."
Note — Khelil's assertion about current U.S. gasoline stocks is false (graph left). Falling gasoline stockpiles are now at the top of the 5-year average for April, and below that average for other months. On the other hand, large harmful diesel price hikes and shortages are occurring all over the world.
Although it is true that there is a negative correlation between the dollar's value and oil prices—the latter rises as the former falls—there is no good reason to believe that the plunging dollar has caused the price shocks of the last 8 months (both references are to James Hamilton's Econbrowser).
Khelil's thoughts on the oil price are simply another in a long series of excuses OPEC puts forth to justify their production policies. OPEC's president is actually saying that $200/barrel oil in the next few years is OK as far as they're concerned.
Two Views of Your Future
We need to set realistic expectations about OPEC's future contributions to the oil supply. I have come to see that most people do not share my enthusiasm for graphs, tables and simple arithmetic, but if your future prosperity rested on understanding these numbers and what they mean, you would make the effort, right? That's my challenge to you. My job is to present the material as clearly as I possibly can.
The first graph1 comes from PFC Energy's Global Liquids Supply Outlook, a presentation by Bob MacKnight given on March 26, 2008. The graph shows the non-OPEC crude oil peak in 2010, but focus your attention on the "Call on OPEC" crude oil.
You can see three lines showing three separate scenarios for OPEC crude oil output growth out to 2020, one for yearly additions of 1.1%, one for 1.7%, and a third for 2.4%. These are the low, middle and high cases, respectively. As you can see, most world oil growth depends on OPEC crude (and natural gas liquids) production after 2010.
In PFC's low growth scenario, OPEC must supply 33 million barrels per day (mmb/d) to the world market in 2010, 37 mmb/d in 2015 and 46 mmb/d in 2020. Each growth scenario requires ever-higher OPEC crude production levels as shown, e.g. 37-45 mmb/d in 2015 spans the low to high growth cases.
Our second visual aid, Table 1.5 from OPEC's 2007 World Oil Outlook, shows OPEC's evaluation of the call on themselves in their reference case. Let's calculate the shortfall between OPEC's reference case and PFC's low growth scenario. OPEC's reference case in 2007 did not include Ecuador, which joined the cartel in November, 2007. You may thus add Ecuador's 0.5 mmb/d to OPEC's reference case for each year.
Subtract the adjusted OPEC Crude number in the table from PFC's Low Case number in each year Y. In 2010, the shortfall is 33 − 30.7 = 2.3 mmb/d. In 2015, the shortfall is 2.7 mmb/d. In 2020, the shortfall is 6.7 mmb/d.
You can now easily see that OPEC's call on itself is lower than PFC's lowest growth case2 by a wide, ever-increasing, margin. I daresay that the reference case reflects what OPEC intended to produce—as of 2007—regardless of our expectations. It matters not whether these expectations come from the EIA, the IEA, IHS Energy/CERA, Wood Mackenzie, CGES or any other "experts" you care to name. Only OPEC's opinion matters here because they are in the Driver's Seat in 2010 and thereafter.
Are you going to pin your hopes on OPEC changing the call on itself upward as the years unfold? Think about their sit-on-your-hands policy, their persistent claims that the "market is in balance," Khelil's unconcerned view of $200/barrel oil ... well, I hope not.
It's Worse Than You Think
Although the foregoing paints a bleak picture, the situation is actually worse than you might think. OPEC's reference case may now be viewed as overly optimistic. Some points to consider are listed below. Things get a bit complicated in #1 and #3, so please be patient.
OPEC's average monthly production in 2008 (from the IEA's April Oil Market Report ) is 32.28 mmb/d, so you might say "Well! OPEC is producing more to ease the tight world market." OPEC is mostly adding to its total average monthly output by acquisition, not greater production in the core "OPEC 11". Angola joined the cartel in early January, 2007. Ecuador joined in November, 2007. There are now 13 countries in OPEC. Average monthly crude output was 29.71 mmb/d in 2006, and 30.66 mmb/d in 2007 adding in Angola's 1.61 mmb/d (= 29.05 mmb/d for the "OPEC 11"). Take the 2008 output number and subtract both Angola and Ecuador. The total for the "OPEC 11" is 29.97 mmb/d. This number has hardly moved over the last 27 months.
The adjusted OPEC reference case total of 30.7 mmb/d in 2010 implies production of 28.30 mmb/d from the core "OPEC 11" if we assume current output levels for Angola and Ecuador (= 2.4 mmb/d). This is actually a decrease of 1.41 mmb/d from the 2006 level before either country joined the cartel.
Summing up, total output from the usual suspects—Saudi Arabia, the UAE, Kuwait, Iran, Iraq, Nigeria, Algeria, Venezuela and the others—is assumed to be below the 2006 level in 2010 in OPEC's 2007 reference case. OPEC's Table 1.5 shows that the call on its crude is actually lower in 2010 than it was in 2005.
How much of this OPEC production will be available for export? Less than there used to be according to CIBC's OPEC's Growing Call on Itself. Consumption is rising in the Persian Gulf countries and elsewhere. Read the CIBC report and The Sierra Club Solution for a discussion of the export trends (ASPO-USA, January 30, 2008).
Recent Saudi statements seem to indicate an official change in policy that further confirms the Paradigm Shift position (ASPO-USA, June 20, 2007). This argument states that the Saudis and other oil exporters will not produce their oil in an unconstrained way to meed world demand. King Abdullah told us that "I keep no secret from you that when there were some new [oil] finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'." Saudi Oil Minister al-Naimi validated the King's remarks in the Arab News (April 20, 2008).
This development adds a new wrinkle to what we already knew about Saudi intentions. See The Saudis Are Blowing Smoke Again, ASPO-USA, March 12, 2008. Saudi Arabia's (i.e. OPEC's) low demand projections could be called "a self-fulfilling prophecy" in so far as lower OPEC output after 2010 will price many consumers out of the oil markets. Worse yet, PFC's projection (graph left) shows that even unconstrained OPEC production would only boost world production to less than 100 million barrels per day by 2015 in any case! That's it, that's all there can be and ever will be based on PFC's depletion estimates for OPEC as a whole. (Look through their presentation.)
Top oil exporter Saudi Arabia has no plans to embark on further capacity expansion as long-term oil demand forecasts fall and alternative fuel supplies rise, the Saudi oil minister told industry newsletter Petroleum Argus.
The holder of the world’s largest oil reserves sees no need to go beyond its 2009 capacity target of 12.5 million barrels per day “at least up to 2020,” Minister of Petroleum and Mineral Resources Ali Al-Naimi said.
Long-term future energy demand forecasts have fallen sharply, he said in the interview given to the weekly on April 11, casting doubt on the need for more Saudi oil.
Demand forecasts have fallen as low as 106 million bpd in 2030, down from previous estimates as high as 130 million bpd. The world currently consumes around 86 million bpd.
PFC's low growth case exceeds OPEC's reference case after 2009. But without substantial new contributions from the Saudis over the next decade—we have now been told there won't be any—the reference case itself now appears to be too generous. Oil minister al-Naimi is now asking us to look at OPEC's "low growth" scenario instead of the reference case as shown in Table 4.2 of their 2007 World Oil Outlook (graph left). Take the adjusted shortfalls calculated above for OPEC's reference case for each year and then add the negative number given in Table 4.2. The OPEC crude shortfalls with respect to PFC's low 1.1% growth case are now as follows: 3.6 mmb/d in 2010; 6.1 mmb/d in 2015; 13.5 mmb/d in 2020.
We have moved further into negative territory regarding OPEC's response to PFC's call in the low growth scenario. If this isn't bad news, I don't know what is.
If the foregoing isn't alarming enough, consider that substantial increase in OPEC production in the coming decade would require major contributions from Iraq, Nigeria and Venezuela, now that we know that a 12.5 mmb/d production capacity from the Saudis is all we're going to get. (All links are to past ASPO-USA columns.) Prospects for large production increases from these three countries is unlikely for reasons peculiar to each.
We have now set realistic expectations about OPEC's future contributions. They will not produce enough crude oil in the next 12 years to meet even a minimal growth scenario. Few subjects are more important than the potential contribution of OPEC crude to world production as we move toward 2020.
I hope you have been able to negotiate through this sometimes tortuous discussion because there is little else I can do personally to convince you that we're all in Big Trouble. In the New York Times' The Big Thirst, the inestimable Jad Mouawad, who is now coming to his senses, quoted former peak oil skeptic Vaclav Smil—
“The country has been living beyond its means,” said Vaclav Smil, a prominent energy expert at the University of Manitoba. “The situation is dire. We need to do relative sacrifices. But people don’t realize how dire the situation is.”
Unless we take some drastic actions, it will be All OPEC, All the Time after 2010 when you will turn on the radio or switch on the TV to listen to the inevitable stories about whether gasoline will finally hit $5 or $6/gallon. But in 2008, our public discourse on the oil situation is still a joke. We need to stop blathering about the boosting the Strategic Petroleum Reserve, opening up ANWR, taking OPEC to court, cutting federal taxes on gasoline, raising taxes on Big Oil, punishing speculators, counting on imaginary cellulosic ethanol, waiting for mass production of plug-in hybrids, and all the other nonsense we are bombarded with every day.
We are sleepwalking toward the oil precipice. OPEC will not meet the fantastic expectations placed upon it by the "experts." I can only hope that Americans grasp this reality soon, because all we're doing right now is rearranging the deck chairs on the Titanic.
Contact the author at [email protected]
1. You will see that non-OPEC crude, condensate, oil sands, and natural gas liquids (NGL) are bundled together with OPEC natural gas liquids. This is standard accounting, because OPEC NGL output is not restricted by the cartel's quota system. Therefore, it is always put on the non-OPEC side of the ledger.
2. OPEC has a "high growth" scenario that only slightly changes the calculations made here. The deficits for this boom scenario work out as follows: 2.4 mmb/d in 2010; 1.8 mmb/d in 2015; 5.3 mmb/d in 2020.