The early reports out of Vienna today are that OPEC will maintain its production output. That’s cheered the bears, who’ve continued to sell crude oil contracts in New York today. As we write this morning, the October contract was trading around $65.50, down about $11 from mid-August.
The prospect of maintaining oil production at current levels with a forecast of slowing global demand inspires selling, of course. Adding to the bearish outlook is the recent news of a major oil and gas find in the Gulf of Mexico. Cambridge Energy Research Associates reports that as much as 800,000 barrels of oil a day could begin flowing from the Gulf’s latest discovery starting as early as 2012.
Surveying the current scene in crude, The Wall Street Journal opines, “For the first time in a long while, it doesn’t seem like the world is conspiring to push energy prices higher.”
We’re not about to argue with Mr. Market’s latest pricing, but we’re the first to recognize that oil is a commodity and therefore subject to the bias of the moment. As a short-term proposition, that means volatility, providing opportunity to those inclined to wade into the speculative waters. The long-term, however, is something else.
We’ve heard a lot lately about the promise of new technologies to supply the world with oil that would otherwise remain lost. The latest discovery in the Gulf of Mexico is testament to the power of that technology. Indeed, the oil found in the Gulf is more than five miles below the water’s surface. That kind of discovery, experts say, would have been technically impossible even a decade ago.
Time marches on and oil discovery and production technology improves. But while the outlook for production on a relative basis looks better, demand isn’t standing still either. In fact, when one puts the latest Gulf discovery in perspective, it’s something less than extraordinary for Americans. Once again, the numbers tell the story.
The United States consumed, as of September 1, 2006, oil at the rate of more than 21 million barrels a day, according to the Energy Information Administration. The new discovery in the Gulf, in other words, represents less than 4% of daily consumption–and the new supply is still at least five years away.
A lot can happen in five years, and we’re confident that the next five years in oil will look like the previous five when it comes to supply and demand trends in the United States. Using EIA data, here’s a quick recap of how September 1, 2006 compares with 2001 data:
* U.S. average daily oil production (including Alaska): down 12%
* U.S. average daily oil consumption: up 5.1%
The combination of falling production and rising demand in the U.S. means that the country’s oil deficit has jumped by an average of nearly 2 million barrels a day since 2001–more than twice as large as the latest Gulf discovery’s potential output. What’s more, that deficit born of falling domestic production and rising domestic demand threatens to continue indefinitely. All the technological advances of the last 30 years have not been able to stop the slow but stead fall in American oil production. Meanwhile, all the warnings in the world haven’t been able to stop America’s consumption. That’s the nature of growth.
The bottom line: the U.S. must run faster just to stay in place when it comes to oil production. The latest discovery in the Gulf is indeed a “significant find,” as they say, but by the time it comes on line in five years it’ll be somewhat less significant. Discoveries and new production must be offset by declines elsewhere in the system for proper oil accounting.
No wonder, then, that the last five years have witnessed U.S. oil imports rise by 11%. If that pace or something comparable continues, which many analysts say is probable, we’re going to need a lot more Gulf discoveries of the magnitude announced earlier this month. Unfortunately, the number of analysts predicting that pace of discovery is exactly zero.