November 21, 2005
THE NORWEGIAN FACTOR
Norway is on the frontline of non-Opec oil production, and the front is under attack.
Norway is the world's third-largest oil exporter, after Saudi Arabia and Russia, according to the Energy Information Administration. The Saudis are the number-one exporters, and Russia is number two. That leaves Norway as the planet's largest reliable source of crude outside of Opec.
In 2003, Norway exported an average of 3.0 million barrels of oil a day, or roughly 90% of its production, which comes exclusively from the North Sea. For context, Saudi Arabia exported 8.3 million b/d and Russia exported 5.8 million b/d.
The problem for Norway, and oil-importing nations everywhere, is that North Sea production has almost surely peaked and is now in irreversible decline. As the EIA advises, "most of the country's flagship oil fields have peaked, with production remaining flat or declining slightly."
A graph of Norway's 32-year oil-production history (courtesy of Norwegian Petroleum Directorate) tells the story of the rise (and now) fall. The country's monthly production history this year only confirms the larger trend. In October of this year, for instance, total production was 2.5 million b/d, well below the all-time peak of over 3.0 million b/d.
Ah, but what a ride it's been. From nothing in the early 1970s to more than 3.0 million b/d of gross production in 2001, Norwegian oil has been a strategic silver bullet for consumers in the West in keeping Opec from casting an even greater influence over crude prices. But nothing lasts forever, including oil wells. Norway's production has been slipping in recent years, and it's widely expected that the decline will continue indefinitely. Rest assured, that Norway's fading oil output will be sorely missed, particularly when oil traders wake up to this fact.
Indeed, the world of crude exports can be divided into Opec and non-Opec supplies. The former suffers from any number of potential problems, starting with a political backdrop that's something less than stable. Meanwhile, virtually all the Opec oil is under tight government control. To the extent those governments are willing and able to help the West with its petroleum addiction, all's well with the world--at a price.
Anticipating the decline and fall of Norwegian oil production will affect Norway first and foremost, and the country's already reading the writing on the energy wall. Norway's oil and energy minister, Einar Stensnaes, back in 2004 told BBC News that it was time to start planning for the inevitable. "Not only is it essential to look for other energy sources. It is also important to look for other industrial activities to develop alongside the petroleum activity," he said.
It's worth mentioning that North Sea oil was discovered in the 1960s, but production of substance didn't begin until the 1980s. Discovering oil takes time, and so does developing the infrastructure for pumping it and exporting it. Of course, without new discoveries, the wait is infinite.
So, what does Norway's decline and fall as an oil exporter mean for America? A slow, but sure squeeze until and if a) a substantial replacement for North Sea oil is found; b) technology makes up the difference by materially boosting efficiency and/or alternative energy sources.
Meanwhile, there are the numbers to ponder. U.S. imports of crude oil have been rising for many years. In 2004, America imported a record 12.9 million b/d, which was up 5.1% from the year before, according to the EIA. The good news is that Norway's share of U.S. imports last year was just 1.8%. The bad news is that the absolute amount of Norwegian imports into the U.S. dropped nearly 12% from the year before.
In fact, Norway's relatively small share of U.S. imports gives false comfort. Oil is a global commodity, which means it's priced globally. Trouble over there means trouble here. There's no place to hide in the global market for oil. Norway's challenges for future production are America's challenges.
In short, all consumption roads eventually lead to Opec. The only question: how bumpy will the ride be?
Posted by jp at November 21, 2005 10:13 AM
It would be nice to think it's possible for a political change of wind in the US, so that alternative energy becomes a priority. Think of what the money thrown away on the Iraq war could have bought!
Posted by: Hal at November 22, 2005 9:35 AM
Norway should hold back production for its own long term use.More cash in the bank is not as good as oil in the ground going forward for Norway
Posted by: lowrie glasgow at November 22, 2005 9:23 AM
because of it's high trade surplus, norway is the most expensive country in the world in which to live. it still has strong iron and copper resources to export.
while the u.s. keeps importing more oil, china's oil imports peaked in the last quarter of 2004, as it came to rely more on cheap coal. we, in the u.s., do not have to drive suvs.
Posted by: realist at November 21, 2005 11:15 AM