May '08 Oil Production Briefing Paper
Executive Summary
Market Summary
Oil prices across all grades remain at all time highs, despite conventional crude oil achieving record production rates. Aviation fuel prices stand out in particular, with an increase in price of over 60% in a little over six months.
Oil supply from non-conventional sources such as biofuels and oil sands are not adding significantly to the supply deficit.
Production data from the American based Energy Information Administration (EIA) and the European based International Energy Agency (IEA) also shows that higher prices are not leading to any significant decrease in demand for oil.
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Commentary
Oil majors have released their first quarter financial reports. Media reports have focused on the record profits generated by the oil companies – Exxon Mobil posted $10bn profit in the first quarter, for example. However, there has been no analysis of oil production rates from the oil majors, all of which are in decline. Shell’s oil production has been falling for six years, BP’s production seems to have peaked in 2005 and Exxon Mobil’s output has dropped by 10% in the first quarter of this year.
Local reaction to increased petrol prices has been of the "shoot the messenger" variety, with calls to eliminate GST, delay the imposition of fuel taxes and establish an enquiry into petrol pricing. These reactions are understandable, but implicit in these proposed solutions is the idea that petrol, which is a finite resource demanded by every country on earth, is somehow "too expensive", and that perhaps, one day, petrol prices will come down. In our view this policy of hope is not an effective strategy. We believe that petrol prices will continue to increase due to supply constraints. Higher prices send an important signal to consumers to reduce their demand and seek less oil dependent lifestyles and modes of transport. Delaying any price increases or reducing the price of petrol will only delay this transition.
At a Government level the price signals should not be ignored either. All levels of government should be preparing contingency plans to handle further increases in the price of oil, and communicating that higher fuel prices are likely. The Campaign for Better Transport has made a number of recommendations to central Government, and we are currently waiting on a response to these.
Rail operations – in particular electrified rail - are well placed to capitalise on increasing fuel prices. Freight movements by diesel rail are up to three times more fuel efficient than equivalent freight tonnage by truck. In this regard, the recent Government initiative to purchase Toll’s rail and ferry operations is timely and further investment in the rail network, particularly electrification, is strongly encouraged as a long term strategic hedge against rising fuel costs.
Oil Price Trends
Weighted Average
Denominated in either US dollars or Euros, the price of oil continues its upward trend of the last five years.
Aviation Fuel
Refined aviation fuel prices are climbing at unprecedented levels in the last few months, to around $145 a barrel. It is worth noting that due to extensive hedging, these prices have not yet impacted on airline profitability or ticket prices. For instance, in the current quarter Air New Zealand has hedges in place so that they effectively paying no more than $83 a barrel to cover 83% of its anticipated fuel consumption. In January 2009, this level of coverage falls to 7%.
Oil Production Trends
Conventional Oil
Total global conventional oil production in January broke a new all time high production record at 74.47m barrels a day, exceeding the previous all time high set in May 2005 of 74.3m b/d. However, these record supply levels have not been enough to dampen demand from consumer nations.
Unconventional Oil
Unconventional oil supplies are coming online at record rates, however supply constraints are emerging with bio-fuels and oil sands.
Reliance on crop based bio-fuels are leading to increased food prices, and it has been estimated that for Europe to achieve of 5% of crop based biofuel use would require 20% of its arable land.
Canadian oil companies are pouring more than $100m into oil sands projects, however this will only achieve output of 3m barrels a day at best by 2015. Also extremely large amounts of energy are required to extract oil from oil sands, and it has been estimated that for Alberta to achieve 5m barrels a day would require 60% of all gas available in Western Canada each year. For this reason some companies are considering establishing nuclear power plants to provide sufficient energy to effectively melt oil sands into more usable oil.
Environmental impacts have also been highlighted recently in an incident where about 500 migratory birds died after landing in a toxic tailings pond.
World Exports
While it is important to recognise the overall oil supply situation in determining oil prices, it is even more important for oil consuming nations such as New Zealand to consider the amount of oil that is able to be exported by producer nations. As the internal economies of producer nations grow, less oil is available for export, which exacerbates supply constraints. In a previous issue we highlighted Indonesia as an example, which is actually a net importer of oil now, even though it is a member of OPEC. World exports are difficult to calculate for countries outside of the OECD, however it is possible to estimate export levels. The following chart shows that export levels of both conventional and unconventional liquids have been static for a number of years now.
