off to a very slow start today…

…so I’m not going to write very much.

During the first world oil shock (1971 – 74), the US was unique among developed countries in enacting a byzantine system of oil price and distribution controls aimed at preventing the ipact of higher prices from affecting the country (don’t ask for details).

One facet was to price oil from already producing wells substantially below world market level.  The idea, I guess, was to prevent owners of oil from enjoying a profit windfall from the upward spike in oil that was occurring at that time.  One unintended effect of the legislation was that the supply of such “old” oil began to shrink rather rapidly.

After controls were abolished during the Reagan administration, curious as always, I asked executives of a number of big oils whether the falloff in  “old” was due to lack of new investment or to a deliberate decision to shut the wells down to await for higher prices.  The answer was uniformly the latter.

I think something similar is beginning to happen in the US today–not the price controls, shutting wells in.

More tomorrow.

 

crude oil

starting with the basics…

A barrel of crude oil is a container filled with flammable liquid that weighs about 300 lb and occupies a volume of about 5.6 cubic feet.  A cube measuring a yard on each side would hold about 7 barrels and weigh a ton.  In other words, storing and transporting oil is a major issue.

According to OPEC, world oil demand is now about 91 million barrels daily.  That figure is likely to grow by about a million barrels daily during 2015.

World supply is just under 93 million barrels daily.  The difference between supply and demand, 2 million barrels daily, is enough each week to fill three of the largest oil tankers around.

Oil producers prefer to keep output steady,  because that optimizes the amount of oil that can be recovered through a given well.  Oil usage, on the other hand, is seasonal, with peaks in the US–the world’s largest consumer of petroleum products–during the summer driving season and the winter heating oil season.  Temporary storage, either in tanks or on the seas in oil tankers, holds the “extra” oil in the slack seasons.

…and on from there

What happens to the 2 million barrels of daily output that consumers more or less don’t want?

The standard answer is that speculators with access to storage bid a price on the spot market that they figure will allow them to cover their costs and make a profit when they eventually sell.

There have also been press reports that China has been buying large amounts of oil recently to build its strategic oil reserve.

The issue of imbalance between supply and demand has been developing for several years.  High prices prompt conservation, for one thing.  They also make high-cost shale and tar sands extraction economically feasible.  And until  relatively recently continuing instability in the Middle East has kept output from this important producing region below normal–offsetting the growth of shale oil from the US.

near-term potholes

In a few weeks, we’ll be entering the lowest-demand time of the year for oil.  It will be too late to manufacture and deliver heating oil to customers for winter use; driving doesn’t pick up until April-May.

Paradoxically, lower prices can trigger a spate of new output entering the market.  This could come from oil-producing countries trying to offset the price-related shortfall in their inflows of hard currency, or from financially leveraged private companies needing cash to service bank loans, or from companies whose oil inventories now look much too big.

 

More tomorrow.