June 14, 2005
TALKING TOUGH, TALKING TURKEY, AND JUST PLAIN TALKING
The sound of desperation is in the air these days regarding the matter of crude oil. Or is that merely the squealing that comes whenever reality is accepted at face value?
Against the backdrop of OPEC's latest rendezvous in Vienna, and more than a few signals that the cartel's back is up against the wall in trying to raise production, the U.K. energy minister started talking tough on oil drilling in the North Sea.
Malcolm Wicks will reportedly take a "hardline stance on mature North Sea oil fields this week, pledging to revoke exploration licenses if companies fail to develop their assets quickly enough," according to a story over the weekend in Scotland on Sunday. It seems that worries of oil sitting idle is a fear that no forward-looking energy minister in Britain can tolerate. What's next? Congress enacting legislation that forces the oil industry to drill in ANWR?
Perhaps there's a connection between Wicks' ambitious new policy and the view, as reported by the U.S. Energy Department and others, that North Sea oil production has peaked as is now fated for an illustrious decline. In any case, it's hard not to notice the heavy hand of government getting becoming ever more active in the business of drawing oil from the ground. As Scotland on Sunday explained, "In a report to be published this week by the government's North Sea task force PILOT, Wicks will reveal details of a new scheme that allows him to force oil companies to invest in fields where evidence of oil has been found."
It wouldn't surprise any one to learn that the United Kingdom is interested in maximizing domestic oil production at a time when questions are swirling about global supply. (The U.K. and Norway are the main owners of North Sea oil.) Given the fact that North Sea oil has been a critical supply of non-Opec oil, Britain's reluctant to let its former energy silver bullet fade without a fight.
But even Opec's not quite the cartel it once was. Yes, the boys from Vienna are going to raise their production target, or so the media's reporting. But the fresh supply will be marginal at best, totaling roughly 500,000 barrels a day. As the Guardian newspaper observed today, the member states of Opec are already pumping oil at capacity. "A rise in output by half a million barrels a day will have little effect on high oil prices, Opec officials conceded today," the British newspaper reported a day ahead of the group's meeting in Vienna.
The head of energy research at Barclays Capital in London agrees, and then some. "Even if Opec decides to raise its output ceiling, it won't ease fears of tight supply toward the end of the year," Paul Horsnell told BusinessWeek today.
What's more, don't blame the cartel for the current state of energy markets, Opec told the United States, Europe and other oil-consuming economies that rely on Middle East imports. Rather, take a look in the mirror, and start building more refineries in the process. "The supply is here, inventories are building, there is certainly no shortage of supply -- so build, build refineries," Saudi Arabia's Oil Minister Ali al-Nuaimi counseled his nation-state clients, according to Agence France-Presse via Channel NewsAsia. "Start building refineries and you will solve maybe half of the problem," he said to reporters as he jogged in Vienna. "We have to convince the governments to build refineries in the United States and elsewhere. Everybody is late in building refineries." Indeed, neither Europe nor the U.S. has built a new refinery since the 1970s, Bruce Evers, an analyst with Investec in London, comments in the article.
But refineries, old or new, need oil. And when it comes to delivering more, the cartel has learned to talk turkey. Opec President Sheik Ahmad al-Fahd al-Sabah of Kuwait, when asked if the much-discussed plan to hike the cartel's production quota by one-half-million barrels a day is substantial or something less, responded, "Just symbolic," according to Reuters. Honesty won't necessarily bring prices down, but it's a refreshing change nonetheless.
Posted by jp at June 14, 2005 7:01 PM
The comment by the British energy minister that he will revoke licenses from firms that don't drill brings up the question of why a concession holder wouldn't drill.
The only answer I can think of is that they think the oil is worth more in the ground than current revenue would be in their bank. To reach this conclusion, they would have to believe that they have a finite supply and that future prices will be substantially higher. Since the cheapest place to store oil is in the ground, that is what they are doing.
The same logic would not hold for reluctance to drill in ANWR as there is no current concession holder, so if the oil is of value, someone should rush to claim it.
Posted by: Jack at June 14, 2005 10:26 PM