“Crude oil… Still A Long Way To Go”

Nowadays the most common saying in the west is “Buying a Car is much easier than keeping it rolling”Its all due to the sky rocketing crude oil and gasoline prices.

What an amazing rally is going in the energy prices! No body has ever thought that the crude oil prices will surge past $100 per barrel just few years back. But now it has become realty and it is forecasted that in the times ahead it can even cross $200 per barrel. The six-year old bull run in crude oil futures that has taken prices from $25 per barrel to more than $100 per barrel shows no sign of coming to an end. The most remarkable aspect is about the current bull run is that over the past one year it has surged by more than $50 per barrel.

Voracious appetite for crude oil is evident by the fact that “The entire world is consuming oil at a rate of more than 1,000 barrels per second” including all kinds of crude oil products. According to the International Energy Agency, global oil demand would increase to an average of 87.8 million barrels per day though out 2008.

The world uses about 87 million barrels of oil a day. Current decline in production is   4%. That means we need to find about 3.5 million barrels/day worth of supply.

With the rapid globalisation and industrialization the usage of crude oil is increasing day by day. And that has taken it toll on the scarce non-renewable resource like Crude oil.

Some amazing facts about crude oil
· America is the world’s largest consumer of oil, guzzling more than 7.5 billion barrels per year.
· India import more than half the oil it consumes, and that is still rising.
· More than 81% of the world’s discovered and useable oil reserves come from just 10 countries. Iraq, Kuwait and Saudi Arabia produce 30 percent of the world oil.
· The world consumes an astonishing 173 billion barrels of oil every 2.4 years.

Let’s have a glance at the main reasons behind the current surge in the crude oil price:

Relentless global demand: -Oil demand in the past 10 years grew 1.5 million barrels per day, and the cost of finding new oil keep on rising. The problem for many oil producers is that they fail to replace reserves.The demand from China, India and other emerging economies continue to surge at a rapid pace . Considering the decline rate in existing oil fields, the world needs some 37 million barrels of new capacity to keep pace.

Increasing demand from OPEC countries: -The economies of OPEC countries are growing so fast that their domestic need for energy is sucking up their exports. This sharp growth by world’s most important suppliers can lead them to start importing oil within a decade. OPEC member Indonesia has already started importing more oil than it exports. Mexico could be doing the same within five years. And domestic consumption in Kuwait, Saudi Arabia and Iran is soaring. According to a report from CIBC World Markets, Russia, Mexico, and OPEC members will cut crude exports by as much as 2.5 million barrels a day by the end of the decade

Geopolitical Tensions: -Geopolitical tensions worldwide affect the supply of the Crude oil. Recently world supplies have been trimmed by substantial cutbacks in production in Iraq and Nigeria. Nigeria alone has lost about 10 percent of its daily production since guerrillas stepped up their sabotage and kidnapping of oil workers in the Niger Delta at the end of last year.

Tumbling Greenback:- Another factor causing the rise in oil prices is the falling value of the dollar. A depreciating dollar depresses investment by oil companies in developing fields because their salaries and other costs go up in local currencies as their earnings from dollar-denominated oil go down. This will impact new oil exploration and thereby supply crunch. Canadian dollar reaped most benefit from the rocketing Crude oil prices as it appreciated to record against the US dollar .The Canadian dollar appreciated, as it is the major exporter of crude oil to U.S. It also encourages continued global consumption by shielding foreign buyers, whose currencies have been rising in relation to the dollar, from the full effect of price increases.

Natural Calamities: -Natural calamity such as Hurricanes, Earthquake etc is the major threat in the supply disruptions across the world.

Accidental Stoppage:- Due to some accidental damage supply gets disrupted. Like blast at the West Texas refinery last week halted processing of about 70,000 barrels a day for 3 days.

OPEC Cartel:- OPEC is the pivotal organisation acorss the world from which most of the Crude demand is fulfilled. The OPEC members decide on the any increase or decrease in its output. In its recent meeting in Vienna on 5th March 2008 it refused to increase the output because of the following reasons.
Ø Need of Cash: Saudi Arabian demographics are shifting such that there’s less oil revenue per person (72% less than in 1980) so it has to cash in while the getting is good. That means keeping oil prices as high as possible without triggering a recession that would cut into profits.
Ø Iran:Saudi Arabia is scared of fellow OPEC member Iran, and doesn’t want to annoy Iran’s leadership, which opposes any supply increase.
Ø Peak Oil: Saudi Arabia want to encash as much as it can from the current oil boom as the time goes on its profit margin will get reduced because whatever new oil it could pump would be extracted at a greater price.  Saudi Arabian oil output to reduce by 22%in 2010.
Next OPEC meeting is scheduled on 9 th September this year in Vienna.

Supply Demand Scenario of Crude Oil      
 

                                                                                                            Source EIA

From the above graph one can  notice that the world demand growth is going to increase at steady pace but the OPEC capacity growth will slowly diminish in the next couple of years.  While the  biofuel growth may also decline in 2011-12.

The Other side:
But among all the theories of peak oil, one should not forget that still there is ray of hope at the end of the tunnel. These facts given below will help this cause:
Approximately six to eight trillion barrels each for conventional and unconventional oil resources (shale oil, tar sands, extra heavy oil) inclusive of future discoveries is still present on the earth. The industry recovers an average of only one out of three barrels of conventional resources underground and considerably less for the unconventional. This benchmark, established over the past century, is poised to change upward. Modern science and unfolding technologies will, in all likelihood, double recovery efficiencies. Even a 10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources – an additional 50-year supply at current consumption rates.

Conclusion:
Lastly I would like to stress on the fact that world must find alternatives for all hydrocarbons, beginning with oil.  And we have procrastinated until the eleventh hour. The questions still remains that will we just accept the devastating efffects of the coming oil shortage, or will we actively work to solve the problem while we still may have time?

And even if new energy products like bio ethanol, wind energy, solar and others take over, as an alternate it will take at least 15-20 years to fully rely on those sources .

As we all know that Crude oil is a non-renewable resource and one day it will extinguish from earth. We have limited stock of crude oil on earth and it depends on us that how judiciously and economically we use it.