Fibonacci

Saudis, Oil Producers Invest Too Little to Bring Prices Down
2005-04-19 00:08 (New York)


By Joe Carroll
April 19 (Bloomberg) -- The world's energy producers, from
Exxon Mobil Corp. to Petroleos de Venezuela SA to Saudi Aramco,
are failing to invest enough in exploration and production to
keep up with demand and hold prices in check.
Producers will spend $176.8 billion this year to find and
develop oil and gas fields, said James Crandell, a Lehman
Brothers analyst who has tracked such spending since 1982. That's
less than the $211 billion in annual outlays the International
Energy Agency says is needed through 2030 as daily demand rises
to 121 million barrels from about 83 million today.
``I haven't seen anybody who can very clearly explain to me
where those 40 million barrels are going to come from,'' former
U.S. Energy Secretary Spencer Abraham said in a March 28
interview in Washington. ``It's going to take a huge amount of
investment, way beyond what I'm seeing right now.''
Lack of investment helped push prices to a record $58.28 a
barrel in New York on April 4 because it eroded OPEC's ability to
pump more oil as demand and prices rose. Excess capacity
cushioned the oil market in the 1990s, a decade when oil averaged
$19.69 and topped $30 just once.
The Group of Seven industrial nations on April 16 called for
the Organization of Petroleum Exporting Countries to boost output
to counter the record prices. Members of the G-7, which include
the U.S, Japan and Germany, represent two-thirds of global
economic output.
``Oil prices currently pose the biggest economic risk,''
German Finance Minister Hans Eichel said at a G-7 press
conference in Washington.

OPEC

Publicly traded oil companies are diverting windfall profits
to shareholders through stock repurchases and dividends, while
state-owned producers funnel cash from record prices into bigger
social programs, the Paris-based IEA said in a Jan. 18 report.
There are ``competing claims for recently inflated cash flow''
the report said.
OPEC, source of 40 percent of the world's oil, may be
reluctant to expand production too quickly for fear any hiccup in
economic growth would cut demand and result in a glut that sends
prices plunging, Ben Walker, a London-based portfolio manager at
Gartmore Global Investments, which manages $78 billion, said in a
March 17 interview.
Adnan Shihab-Eldin, OPEC's former research director and now
its acting secretary general, said in an April 2004 presentation
that oil producers want to avoid a repeat of 1986, when prices
dropped to about $10 a barrel.
Returns on investment for U.S.-based oil companies fell to
0.8 percent in 1986, the second-lowest on record, from 9.5
percent in 1985. The only year returns were lower was 1998, when
the Asian economic collapse pushed crude to $10.35 a barrel and
returns sank to 0.5 percent.

Few Prospects

Exploratory spending has also been restrained because, 150
years after the advent of the petroleum industry, the number of
places left to explore is dwindling, said Aubrey McClendon, chief
executive at Oklahoma City-based Chesapeake Energy Corp.
``There's less stuff to drill for any more,'' McClendon said
during a presentation at a Feb. 16 energy conference in Houston.
``I don't expect there to be a huge explosion in exploration in
the next few years.''
Crandell, with Lehman Brothers in New York, said his survey
of 327 oil companies and state-owned producers found that
``prospect availability continues to be a leading issue hampering
spending, both domestically and internationally.'' Crandell
conducts his survey twice a year, publishing the results in
December and May.
While oil prices have fallen 14 percent since touching their
all-time high two weeks ago, oil bulls say that any decline is a
brief respite in a multiyear rally.

`Trend is Up'

``Oil can go to $35, but the trend for oil is up,'' said
hedge fund manager Jim Rogers, co-founder with George Soros of
the Quantum hedge fund. ``There has been no major discovery
anywhere in the world for over 35 years,'' Rogers said in an
interview yesterday in New York. Oil may reach $100 or $150 in
the next decade, he said.
Exxon Mobil, which pumped more oil last year than every
member of OPEC except Saudi Arabia and Iran, expects global
demand for crude to reach 118 million barrels a day by 2030, said
Scott Nauman, manager of economics and energy planning at Exxon
Mobil Corp., the world's largest oil refiner.
OPEC ``has the resource base'' to provide 20 million barrels
of the increase in daily supply, Nauman said in a March 30
interview at the company's Irving, Texas, headquarters. OPEC
members Iran and Iraq ``have just scratched the surface'' of
their reserves.

Oil and Capital

Twenty million barrels would represent 59 percent of the
global production increase needed to meet Exxon Mobil's demand
forecast. The 11 members of OPEC today pump almost 30 million
barrels a day.
Exxon Mobil's demand estimate is lower than those of the
International Energy Agency, International Monetary Fund and U.S.
Energy Department partly because the company expects fuel
efficiency in automobiles and trucks to increase by 2.2 percent
annually.
Fatih Birol, chief economist for the International Energy
Agency, also said that Middle Eastern countries such as Saudi
Arabia, Iran, Iraq, Kuwait and the United Arab Emirates have
adequate resources to meet global needs over many years. Whether
they will adopt policies that attract needed investment is less
clear, he said in an April 14 interview.
``There is enough oil and there is enough capital,'' he
said. ``Whether they can meet or not, this is the question.''

Iran, Saudi Arabia

Iran is off-limits to U.S. oil companies such as Exxon Mobil
and ChevronTexaco because of U.S. laws designed to punish the
country for supporting terrorism. Saudi Arabia has kept its oil
industry in the hands of Saudi Aramco. Iraq's output remains
about a third lower than it was five years ago as insurgents
attack the oil infrastructure.
The Goldman, Sachs & Co. analysts who predicted last month
that oil could reach $105 a barrel said restrictions on oil
industry investment in the Middle East and Russia are part of the
reason for tight supplies.
To be sure, producers including Saudi Arabia and the United
Arab Emirates are promising to boost their production capacity.
Exxon Mobil's Nauman predicts that the obstacles to boosting
output in the countries with the biggest resources ``tend to work
themselves out.''
Abu Dhabi, which produces most of the oil in the U.A.E.,
will add 200,000 barrels per day to its output capacity by early
next year, Yousef Omair bin Yousef, chief executive of Abu Dhabi
National Oil Co., said in an April 13 interview. ``There is more
oil to be discovered,'' he said. The U.A.E. is about even with
Kuwait as the fourth-biggest OPEC producer.

Future Exploration

Abdallah Jum'ah, chief executive of Saudi Aramco, struck a
similar tone.
``There is plenty of new onshore and offshore exploration
across the world still to come, especially in an environment of
healthy oil prices,'' Jum'ah said in a Feb. 15 speech in Houston.
Saudi Arabia has ``long term'' plans to raise capacity by 43
percent to 15 million barrels a day, he said.
OPEC expects to shoulder 51 percent of the world's demand
load by 2025, up from 40 percent today, Shihab-Eldin said in his
April 2004 presentation.
Oil producers need to find new sources of crude to slow a
price rise that ``will continue to present a serious risk to the
global economy,'' Raghuram Rajan, the International Monetary
Fund's chief economist, said April 7 on a conference call.
Developing countries, which are most at risk because of
their reliance on energy-intensive manufacturing, could see
growth slashed by more than 3 percentage points by $80 crude, the
IMF said. In developed nations, the effect would be closer to
three-quarters of a percentage point.

--With reporting by Julie Ziegler in Washington and Matt Leising
in New York. Editors: Dieterich, Todd.

Story illustration: To graph 20 years of oil prices, based on
benchmark New York crude futures, see {CL1 <Cmdty> GP Y <GO>}.
For a chart showing the historical volatility of crude-oil

Fibonacci

STREET LIFE
Are Oil Prices Headed for a 'Super Spike'?
Some analyst at Goldman Sachs says it's going to $105 a barrel!
By Andy Serwer


The news spread instantly across Wall Street trading desks on a Thursday morning at the end of March: "Some analyst at Goldman Sachs says oil is going to $105 a barrel! He's calling it a 'super spike'!" Within minutes the price of oil was surging—a day later it would hit a new high of $58 a barrel. Angry investors lashed out at Goldman, calling the report preposterous and accusing the firm of manipulating the market to benefit its energy-trading desk. There were calls for a government investigation. The host of one cable TV business show wondered whether the guy who made the call had "some type of insidious background." A week later, at the firm's annual shareholders' meeting, Goldman Sachs CEO Hank Paulson felt compelled to defend the report and the integrity of the analyst and his firm. Whew! Such is the nature of the oil markets these days.

So just who is this super-spike man, and what in the world was he thinking? Well, his name is Arjun Murti, and he's a veteran oil analyst and a managing director at Goldman. Press-shy by nature anyway, the poor guy was so unsettled by the reaction to his report that he refused all interview requests—until, that is, I was able to persuade him to take my call. He declined to have his photograph taken for this story.

Some will say that Murti should have realized that his prediction would cause outrage. Not necessarily. First of all, Murti's report is a thoughtful, 30-page piece of logical analysis that was grossly oversimplified by most of the media. (Al Jazeera ran one of the more reasonable reaction stories.) Second, Murti had previously raised the notion of a super spike in two reports last year—in June and September—forecasting a then sensational peak price of $80 a barrel. Last, the theory circulating that he wrote the report to benefit Goldman's trading desk is idiotic. (If or when Goldman pulls a lever to jack one of its trading positions, let's face it, you wouldn't know about it!)

The crux of Murti's theory is simple: We're in the middle of a classic boom-and-bust cycle. The economy has been heating up here and in China, which pushes up the cost of crude. When the price of oil—and especially, here in the U.S., of gasoline—climbs too high, it curbs economic activity, which then depresses the demand for oil, causing prices to drop. Nothing revolutionary there. For now, though, demand for crude is continuing to rise—if a little more slowly than last year. That means prices could go higher. Remember: In terms of 2005 dollars, oil peaked in 1980 at $85 a barrel.

But isn't all this talk about a super spike a little hysterical? "All I did was to raise the high end of my price band from $80 a barrel to $105 a barrel," says Murti. "Spending on gasoline in the U.S. relative to the overall economy is still well below where it was in 1980-81. So demand could still climb from here." To get to his peak price of $105 a barrel, Murti says, there would probably have to be a disruption in supply, as from some major terrorist action. "Most investors are only familiar with oil cycles in the 1990s, when the price modulated gradually and moderately," Murti says. "The current environment is more like the 1970s." That may not sound like great news for consumers or business, but remember that the '70s weren't a bad time to own oil stocks. Which is the point of Murti's report in the first place. He's an oil analyst. Recommending oil stocks is his primary charge. (Exxon, Amerada Hess, and Murphy Oil are three of his picks; for some unconventional oil plays, see Pipers That Still Pay.) His mistake may have been broadcasting that the price of a barrel of oil could soon resemble an NBA score. Investors who cry foul might be making a mistake by tuning him out.

http://www.fortune.com/fortune/stree...romoid=preview

Fibonacci

Analysts see scene being set for another set of oil price shocks next year

http://www.msnbc.msn.com/id/28527108/

Bearcat94

^^

The oil industries "exploration problem" is the same problem that makes "alternate" energy solutions difficult.

When oil is cheap the alternate can't compete; when oil is expensive the alternate looks more viable.

We won't see a "serious" attempt at alternate energy until oil goes high and stays high.

(no, I don't know how high is high enough).

Acura TL Builder

Don't forget the US is going from 10% to 15% ethanol content June 21. This will be in effect for 6-12 months(permenent).

In the name of stretching the gas. Will this be detrimental to engines long term?

doopstr

What will it do to the price of everything in the super market that uses corn?