With Oil and Gas, it's not a matter of what will happen, but when it's going to happen
By Katherine Young Mar, 8th
Oil and Gas
First the obvious: anyone who drives a car has noticed that gasoline prices are up. And for anyone following current politics, oil is the dirty word - apparently the ‘real’ reason behind political maneuvering on the world stage. So what is really going on with oil? Let’s take a look. Oil keeps us heated, in our homes and businesses. It is the chief source of fuel for all industry. It is the source of energy fuelling virtually all transportation worldwide. Now consider that the US, a nation defined by its high standard of living, relies heavily on oil imported from unpredictable state-controlled sources of oil like Iran, Venezuala and Nigeria. Oil is the world economy’s most important energy source, and as such, it is critical for economic growth. And there are no substitutes considered noteworthy in the immediate future. In other words: it’s all about the oil.
What It’s Used For
Crude oil (or petroleum) is the unprocessed oil that is harvested from the earth. The oil refining process separates crude oil into several different distillates of varying quality.
Natural gas--used for generating electricity, residential and commercial heating and cooking, fertilizer, plastics, anti-freeze and fabrics, and as an alternative transportation fuel.
Gasoline (or petrol)--transportation fuel
Kerosene (or paraffin oil)--jet engine and tractor fuel and heating fuel in poorer countries
Diesel--transportation fuel for diesel engines and heating oil.
Lubricating oil--motor oil, grease and lubricant
Heavy gas (or fuel oil)--industrial fuel
And residuals are used for coke, tar, asphalt and waxes.
How and Where is it Found?
Crude oil is found in porous rock under the earth. It is extracted from oil wells in oil fields using various processes depending on how accessible it is. Many theorists suggest that we will soon reach, or have already reached ‘peak oil’ where we have used half of all oil reserves, the easiest half to extract. They theorize that as we move to mostly secondary and tertiary oil production methods, diminishing oil reserves become more costly to access and the cost of oil goes through the roof.
As far as determining where the oil is, many independent analysts and journalists state that official, government sources of information regarding oil reserves are politically influenced and therefore unreliable. In 2006, Oil and Gas Journal reported that total world oil reserves were 1,293 billion barrels of oil. Of that, 71% are located in the Middle East and Canada.Gravmag.com reports that having consulted several sources, the most accurate possible estimates of the world’s largest oil fields are, in declining order: Ghawar in Saudi Arabia, Burgan in Kuwait (in decline), Cantarell in Mexico (in decline), Bolivar Coastal in Venezuela and Safaniya-Khafji also in Saudi Arabia.
Source: USGS
USGS source
Natural gas is associated with oil fields as well as natural gas fields and coal beds. The two largest natural gas fields are the South Pars gas field in Iran and the Urengoy field in Russia. The top natural gas producing countries, according to Gravmag.com are Russia, Iran, Qatar and the USA.
Who Produces It, Who Consumes It?
By far the largest consumer of crude oil is the United States followed by China and then Japan.
The largest oil producing nations are Saudi Arabia, Russia, and Iran. In 2005, 23.8% of world oil was produced by OECD nations (Europe plus Canada, Mexico, Australia, New Zealand, Japan, Korea, and the United States) and 14.8% by the former Soviet Union.
The Organization of Petroleum Exporting Countries (OPEC) hold approximately two-thirds of world petroleum reserves and in 2005 were responsible for 41.7% of world production. OPEC is made up of twelve nations:
Algeria
Angola
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela
These nations together protect their oil interests and influence oil prices. OPEC is widely considered to be a cartel.
Crude Oil and related products per day on average in 2006. (Numbers refer to millions of barrels of oil per day)
Nation
Net Exports
Production
Saudi Arabia
9.0
10.9
Russia
6.4
9.44
Norway
2.8
3.1
Iran
2.721
4.259
Nigeria
2.4
2.6
United Arab Emirates
2.4
2.8
Kuwait
2.3
2.6
Venezuela
2.1
2.855
Algeria
1.8
2.0
Mexico
1.756
3.791
Libya
1.5
1.7
Iraq
1.367
1.942
Angola
1.1
1.2
Qatar
1.04
1.08
Kazakstan
1.0
1.2
Canada
0.832
3.151
Oman
0.714
0.781
Azerbaijan
0.46
0.6
Ecuador
0.376
0.538
Equatorial Guinea
0.34
0.356
Yemen
0.333
0.41
Argentina
0.323
0.44
Malaysia
0.3
0.8
Sudan
0.28
0.36
Colombia
0.26
0.53
Chad
0.244
0.249
Congo (Brazzaville)
0.240
0.245
Denmark
0.20
0.39
Gabon
0.2
0.2
Brunei
0.231
0.237
Turkmenistan
0.170
0.260
Vietnam
0.111
0.370
Egypt
0.1
0.7
United Kingdom
0.1
2.9
Uzbekistan
0.030
0.150
Indonesia
-0.1
1.1
Australia
-0.36
0.56
India
-1.7
0.8
China
-3.7
3.8
United States
-12.2
5.4
Source: Wikipedia
Source: US Department of Energy website “World Oil Markets Chapter 3”
Supply vs. Demand
The Energy Information Administration or EIA reports that world oil demand is expected to rise by 1.6 bbl/d in 2007 and 2008, compared to a rise of 0.8 bbl/d in 2006. With recent stronger-than-expected, sustained, world economic growth, the demand for fuel to literally power the growing economy has increased. Chris Thorpe of Hudson Capital Group points to China, which accounts for approximately 1/3 of world growth in petroleum demand.
Thorpe points to possible glitches in future supply. He notes how dependent the US is on somewhat unpredictable suppliers like Venezuela, Iran and Nigeria. If these suppliers run into production or delivery problems (or cut the taps), or if there is a US war with Iran, supply will be jeopardized.
Also affecting crude supply and demand according to Thorpe is that a long-term bull market and new research have prompted investors to invest in commodities as an asset class. The increase in investor interest in the oil market has effectively decreased OPEC and producer control over supply and increased influence from investment.
Source: Baker Hughes for the Bank of America Energy Conference
Unlike oil, there are significant problems with natural gas supply. The US as a major consumer of natural gas is reliant on importing natural gas and somewhat stumped as to how to effectively transport and store this crucial source of energy for electricity generation. Natural gas is difficult to transport due to its low density. Possible solutions such as importing liquid natural gas (LNG), or compressed natural gas (CNG) pose costly problems in storage, transport and/or processing. Adding to the financial problem are environmental restrictions that make it more difficult for the US to extract and produce possible resources from within the US.
Price and Market Trends:
Experts list a variety of factors influencing oil prices, which make predicting tomorrow’s price of crude tricky business. Chris Thorpe (of Hudson Capital Group) and Daniel Wood (of Daniel Wood and Associates Research and Analysis) agree that even while taking into account strong demand from China’s growing economy, if there is an economic downturn the price of crude could fall.
Arguably, the most uncertain factor is the unpredictability of global politics and how they affect supply. Thorpe also points to another factor influencing prices. Citing what journalist Philip Verleger refers to as “Wall Street’s newest concept”, Thorpe points out that commodities are now being marketed as an asset class and as a result, oil prices are increasingly influenced by the effects of investment (and, inherently, speculation) and decreasingly affected by the efforts of oil producers to restrict supply.
With the bull market in commodities, investors with their ‘new concept’ in hand are increasing their oil inventories to the point where storage facilities are filling. With increased inventories, prices are less affected by supply shortages, even those intentionally created by OPEC nations. However, prices will still be subject to kinks in the supply chain caused by full storage facilities and limited refining capacity especially for the production of sweet crude. These are kinks, suggests Verleger, that could create dramatic, if temporary, fluctuations in oil prices.
Bearing these factors in mind, all of which could create price volatility, Thorpe comments: “For the forseeable future, we think that energy prices will remain stable or rise given a moderate demand outlook.” And a peek at The US Energy Information Administration’s price forecasts reveals the following predictions:
