Tuesday, April 15, 2008

Crude Facts

With crude oil hitting new all-time highs over $114 per barrel, everyone is concerned - to put it mildly. Some of the appreciation is surely attributed to misbegotten monetary policy factors, as the Saudis claim. The US dollar is the benchmark currency for oil pricing and Mr. Bernanke's Fed is throwing good dollars after bad in his attempts to bail out Wall Street, leading to the debasement of the dollar. Another factor is commodity speculation, with risk capital betting on even higher prices. Finally, and most important of all in my view, is the depletion of easily accessible high quality crude oil, i.e. the forerunner of geologic Peak Oil.

There have been millions of pages written about Peak Oil, both pro and con, and I don't claim to be an expert. But I do want to add just one fact based on common sense. Exxon is the world's largest non-state oil company and the largest publicly traded corporation by market capitalization ($478 billion). If anyone has both the incentive and the resources to find and sell more oil, it is them. But they can't. In the last five years, as the average price of oil more than tripled, their production has been flat (see chart below, click to enlarge).


And it's not as if they haven't been trying: their capital and exploration expenses for upstream operations have nearly doubled in recent years.

Data: Exxon Annual Reports

These are not comforting facts.

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P.S. Senator McCain, he who wants to be President, today called on Congress to suspend the federal gasoline tax. Sure thing, Senator... and while you're at it, why not re-instate the draft? After all, we're going to need every boot possible on the ground to safeguard America's energy future. The hard way.

41 comments:

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  38. H_IOUs, I skimmed your Exxon blog yesterday, but it was one of the rare days I didn't peek at the comments. It's disappointing to hear that the incivility common to too many blog commenters has drifted to yours. I hope your new standards take hold; I've been recommending your blog to colleagues who don't have a strong background in markets & economics, and are seeking good insights. They rightfully sense the major media & 'talking heads' are doing too much 'happy talk' and lies-of-omissions, but they don’t have the background to fill in the gaps themselves.
    Keep up the good work.

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  39. Note that charts show 'oil equivalent' barrels. This term allows natural gas to be included along with oil on an energy equivalent basis, i.e. 6000 cu ft natural gas = 1 barrel oil. The problem is that a) oil is more valuable, particularly compared with far away natural gas that is much more difficult to transport, and b) drillers have long focused on relatively shallow oil and ignored less valuable deeper natural gas, such that we produced much of the oil early. Exxon is developing a very large gas field in Qatar, and carefully booking some of this gas as reserves each year to balance out their otherwise declining oil reserves elsewhere. So while oil 'equivalent' production and reserves look flat, they disguise falling oil production and reserves.

    Furthermore, we are seeing falling production from nearly all the major producers, including Saudi, Russia, Mexico, Venezuela, US, China, etc.

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  40. re: oil equivalents

    Exxon actually breaks out oil and gas separately, as well as providing an oil equivalent figure. I thought it fairer to show their entire upstream production.

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  41. i am not convinced that Exxon's reduction in exploration success is not more a product of the fact that they don't actually own much oil bearing land. almost 90% of oil and gas land assets are now held by the state-owned oil companies, which are monopolies, and thus operate more as rentiers capitalists as opposed to industrial capitalists, and therefore with less incentive to increase their exploration investment. combine that with the sanctions against iran and the instability in iraq, and i think that also helps to explain the lower exploration success for the industry as a whole.
    brazil's recent declarations about the 30bbl to 80bbl size of their sugar loaf finds demonstrate that it is smaller, state-owned oil companies that are displaying enthusiasm for new discoveries, as is also the case in the countries in Africa who are new to the oil game.

    finally, i think we have to assume that oil execs are still deeply scarred by their experiences from the oil boom and sharp bust scenario triggered by Volcker's tight money constricting US demand in the early 80's.
    clearly there is already a contraction in US demand in the pipeline so to speak when the recession deepens, so i would expect that further exploration is being muted with anticipation of a coming global depression

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