Oil Prices continue into the $55 range today after OPEC expressed concern for output levels. Right now, OPEC is pumping at production capacity with little room if any to produce more light sweet crudes.
Two major points are driving prices right now. One is lack capacity. A number of features could affect capacity including the acts of God clause in any commodity contract. Little things like tropical storms and hurricanes or earthquakes. Then there are the political climates, like terrorist bombings or uncertain political futures. And what about just flat out lack of oil production capacity. OPEC knows about that.
OPEC expressed concern as they pump at the highest levels in decades and at full capacity. Saudi is the only nation left with any production capacity left and most of it is the sour variety with a high sulfur content. It requires a different, more costly process to prepare it for the market place.
OPEC says they will raise the official production quota by 500,000 barrels a day but that doesn’t mean much since they are already producing above capacity. OPEC president and Kuwaiti Oil Minister Sheikh Ahmad Fahad al-Sabah said this is strictly a “symbolic gesture.
Right now, the market is terribly worried about middle distillates. The distillates encompass heating oil, diesel fuel, and jet fuel. Last weeks Energy Information Administration report on U.S. oil inventories surprised many when gasoline and crude oil supplies dropped while distillate inventories rose significantly. Experts didn’t expect that too happen.
Refineries
Refineries remain a major problem in the oil industry. Right now, refineries in the U.S. are producing at near capacity at over 96%. This has two sides to it. One is the fact the these refineries are getting old. The other is nothing new is planned right now. The U.S. hasn’t built a new refinery in 3 decades.
The refineries we do have had a number of problems in the spring involving reformers, power outages and other issues. This doesn’t bode well for a long hot summer that will drive up energy demand.
President Bush continues to push an energy policy although it seems held up in one form or another in Congress. The plan calls for turning defunct military bases into oil refineries. OPEC has repeated concerns that no matter how much they produce, the oil will remain bottlenecked in key countries like the U.S. and China.
The problem with building refineries is that the projects take a long time and the refineries are hard on communities because while they provide jobs, refineries tend to be smelly and dirty and most people don’t want that environment in their town.
More Oil
Where are does more oil come from? Good question. President Bush wants to explore the ANWR up in Alaska. He claims that much oil could be gotten from the lands there. This is an extraordinarily controversial move in the U.S. as many conservation groups would take dead aim at the Republicans in the next election. Right now, Congress has signed off on drilling in ANWR.
Other countries may have some options. Occidental Oil recently worked out an agreement with Libya to help modernize their facilities to increase output. Also, if and when Iraq stabilizes, they could bring a fair amount of oil to bare on the market. The new pipeline from Azerbaijan through Georgia to Turkey promises another million barrels a day by the end of the summer.
Russia could very well be a lynchpin in this too. Information in the Wall Street Journal last fall discussed the distinct possibility of reserves in Siberia larger than anyone ever anticipated. The problem is that Mikhail Khordokovsky and butted heads with President Vladimir Putin and he took down Khordokovsky and his oil company Kukos. They were the largest oil company in Russia and were doing much of the research in Siberia.
Oil consumption continues to grow with no end in sight. The United States is still the leading consumer but China and India have been developing a savage thirst for black gold as well and as other countries develop, they will all start having the thirst.
Right now, OPEC has expressed another concern: alternative energy supplies that don’t involve oil. As the oil prices continue to climb, possibly beyond $60 a barrel, OPEC becomes more of a non-factor in oil pricing. They lose control of oil prices that way, heck they’ve already lost control and if alternatives to oil are found, then they become a non-entity for many, they don’t need oil anymore.
John Stith is a staff writer for Murdok covering technology and business.
