[Marxism] Will the oil run out ? Reflections from a layman, Part II

Jurriaan Bendien andromeda246 at hetnet.nl
Wed Aug 11 15:37:46 MDT 2004


Discussing how much oil there is, and when it would run out, is a
conversation piece, but, as I have noted before on PEN-L, actually nobody
really knows exact aggregate figures; pundits and speculators can only work
from various estimates provided from various official and unofficial
sources, which are compiled using a variety of methods, and revised over
time.

First of all there's the problem of how much oil is in the ground, then how
much can be technically extracted, but also how much can be commercially
extracted, how much has actually been extracted, how much is really
available for sale, and finally how much is actually stockpiled. Obviously
how much can be extracted depends a lot not just on technical factors, but
on costs as related to output prices, i.e. it depends a lot on the state of
the world oil market, which is itself increasingly prone to intense
speculative activity.

After the second world war, the Middle East was said to have perhaps 16
million barrels in oil reserves (deposits), by 1967 the estimate had risen
to 250 billion barrels, in the 1990s it reached 500 billion, and now it's
over 900 billion barrels or possibly close to a trillion.

Current official estimates of world oil reserves range from anywhere between
1 trillion barrels to over 2 trillion barrels, which really means that,
beyond intelligent guesswork, we do not really know exactly how much oil
there is in aggregate, how much can be extracted on an economic basis, and
what the gradient of oil price rises will be in future (it's a safe bet
though that oil prices will rise).

Recently Royal Dutch Shell admitted that official figures for its oil
reserves were really 20% lower than previously reported. But actually, this
year, not just Shell, but also Forest Oil, Pengrowth Energy Trust, Nexen,
Husky Energy, El Paso, Vintage Petroleum, Western Gas Resources, Palm West
Petroleum, Baytex Energy Trust, BP, Gaso Energy and Norsk Hydro have all
revised their proven reserves downwards.

The US House Committee on Financial Services recently invited four experts
including Matt Simmons (Simmons & Company International) for an assessment
of reserves. According to US GAAP accounting rules, oil corporations are
permitted to relate the investments necessary to develop an oil field to the
total proven reserves of barrels they think they will extract. So, the
higher the proven reserves, the lower the costs per year for the oil
corporation. A complicated procedure then exists to assess tax write-offs
and tax credits in this respect, raising the question of "when is an asset
an asset".

According to the Securities Exchange Commission definition, an oil or gas
reserve may be called "proven" if the corporation is 90% certain that is can
actually extract the oil or gas from the ground ("producible oil and gas").
But Matt Simmons claims this makes estimates of "proven reserves"
intelligent guesswork and rather arbitrary, because the 90% certainty of
company X could be the 50% certainty of company Y.

In the case of the 40 km x 3 km Norwegian Ormen Lange gasfield, Shell last
year cited 64.3% proven gas reserves, but this year only 22.6% proven gas
reserves. BP, Norsk Hydro, Exxon and Statoil have all published different
estimates of proven reserves for this same field, which they jointly
exploit. A country like Kuwait, which is the fourth largest oil producing
country, has not changed its official estimate of reserves between 1991 and
2002, even although around 8 billion barrels were taken out of the ground.

Economist Fatih Birol of the International Energy Agency in Paris claims
that oil prices are high now, because globally there is structurally
insufficient supply, and that more "investor confidence" is needed. He also
admits that the current definition of proven reserves is "no longer
sufficient". The IEA has in fact said, that it will publish recommendations
in the World Energy Outlook (26 October 2004) which hopefully will end
current controversies surrounding the precise definition of "proven oil
reserves".

All in all, world oil demand growth during 2004 could be the fastest in 16
years. A third of the increase is claimed to be due to increased Chinese
demand, and a quarter contributed by North America. The Harris Poll in May
showed that more than 70% of respondents blame OPEC and foreign oil
producers for the rise in oil prices, while only 23% see the US government
as responsible for the high oil prices. But that is most probably a fallacy.

John Eichberger, director of motor fuels for the US National Association of
Convenience Stores, noted in September 2002 that "We have lost more than 50
percent of our domestic refineries since 1980 and have lost 40 percent in
the relationship between refining capacity and consumer demand over the same
time period (11 percent reduction in capacity, 39 percent increase in
demand)." Currently US refineries are operating pretty much full tilt.

High oil prices could lower world GDP growth by 1 percent in real terms.
According to a recent IEA estimate, a rise in oil prices from US$25 to US$35
if sustained over a full year, would:

- transfer income from oil importers to the suppliers of $150 billion
- lower world GDP growth by at least 0.5% (about US$255 billion)
- raise world price inflation by 0.5%.

With world demand at over 81 million barrels per day and increasing, the
actual income transfer could work out much higher. Rising oil prices, which
went over $40 a barrel recently, could reduce GDP growth in South Korea, the
Philippines, India and China by around 1%. The poorer countries are of
course affected the most.

Increasingly there are calls for greater disclosure. Thus, the demand is
that the oil corporations and subsidiaries should publish exactly what their
oil and gas fields are, and provide independently audited figures for the
exact output per field in the last 5 years, if possible on a quarterly
basis. What is needed are valid estimates of the total oil in the ground,
the number of barrels that can potentially be extracted, and the number of
barrels that is actually extracted. But whether the oil corporations will
comply is another story. After all, apart from technical difficulties in
making reliable standard estimates, there's a lot of money involved in
reports of data on estimated reserves, because they affect not just tax and
company reports but also the burgeoning speculative trade in oil stocks and
oil futures.

On 14 May 2004, the open interest on Brent Crude futures (the outstanding
amount of such oil derivatives) reached 375 million barrels, which is about
five times the total daily production of all sorts of oil world-wide.
According to the Commodity Futures Trading Commission, over the year to
mid-June 2004 the total value of open interests in crude oil-based futures
and option contracts traded on the NYMEX grew by one-third, a value of $26.6
billion. On the NYMEX around 40 million contracts are said to change hands a
year, equal to more than 40 billion barrels of oil.
"As more money moved into hedge funds, it has driven fund managers to look
at oil, because there is only so much interest-rate position you can take,"
according to David Kitson (head of global energy at JP Morgan in London) in
the San Diego Union Tribune. In Asia Today Online, Merrill Lynch's Mike
Rothman claims "This is the worst speculation that I have seen in the last
20 years [in recent history the biggest oil price spike was at the time of
the Iranian revolution in 1979-1980 - JB]. A typical net long or short
position by a hedge fund is 60 million barrels. This is very high
historically. In the last 10 months, hedge funds have generally been holding
a range of commodities from copper, gold, aluminium and zinc. They are
playing on China's demand for commodities and an anticipated upswing in the
global economy. The flow of funds into energy funds has been the highest in
a decade. From my perspective, this is a short-term problem, although the
oil market is facing structural capacity problems which are more serious
than in 2002."

Another reason for increased demand relative to supply is a continuing
build-up of strategic stockpiling in many countries.  The rapid build-up of
strategic oil stocks in many countries is in good part the result of the
shock of 9/11, the subsequent wars and concerns about future instability in
the Middle East. In 2001, George W. Bush in fact ordered the filling of the
Strategic Petroleum Reserve (SPR) up to its maximum capacity of 700 million
barrels. So, despite rising oil prices, the US has continued to increase its
total stockpile, apparently now at 635 million barrels, and reaching the 700
million barrels target next year.

For the 13 OECD countries, Rothman says combined reserves are 1.3 billion
barrels, including the US stockpile. Japan and Germany hold the bulk of the
remaining 700 million-plus barrels. China, India, South Korea and Taiwan are
also building up state-owned oil stockpiles. Investment banker Barclay
Capital estimates that these four countries could increase global strategic
stockpiling by some 215 million barrels within two years.

(compiled from press reports)

Note: for more US oil facts, see http://www.eia.doe.gov/emeu/cabs/usa.html

Jurriaan







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