Radical Noesis - Thinking outside the box

So, if they are right, gas prices should come down for summer. However, that is not what they are projecting. Rather, they predict about a 10% increase in prices. That should make their summer estimate roughly $2.88 a gallon. Then they go on to say that gas prices should be down significantly by September. They hope that all of the damage to Gulf oil infrastructure will be repaired by then (roughly 23% is still off line), and they are crossing their fingers that there are no new shortages or storm damage. But then they go on to say:

"Last year was noteworthy for the two hurricanes that negatively impacted U.S. production growth and were the prime contributors to making overall non-Organization of Petroleum Exporting Countries (OPEC) production growth zero. But, in some ways 2006 is likely to bring an even tighter global petroleum market than 2005, if one sets aside the effects of the two hurricanes on U.S. production last year. Consumption growth out paces production growth in 2006 by 0.4 million barrels per day (bbl/d), compared to 0.1 million bbl/d greater consumption growth than production growth in 2005. Also, while the world experienced a global stock build in 2005 of 0.5 million bbl/d, a stock build of just 0.1 million bbl/d is expected in 2006.

In addition, recent events in Nigeria that have shut in production, the security situation in Iraq, and the Iranian nuclear situation contribute to current and projected high oil prices. The year 2007, however, is expected to see a market that is somewhat looser as non-OPEC supply grows more strongly.

While world spare crude oil production capacity is projected to increase modestly in 2006 compared to 2005 (Figure 4. World Oil Spare Production Capacity), OPEC crude oil production (all spare capacity is in OPEC) stays flat in 2006 compared to 2005, instead of increasing along with non-OPEC supply to meet demand growth. Spare capacity in Saudi Arabia should grow in 2006, but the net amount is not large enough to really reverse the trend whereby inventories must play a larger role buffering the market, with the attendant price effects. So, although we now forecast a small inventory build rather than a draw for 2006, we are not expecting prices to fall significantly.

Non - OPEC supply is expected to grow by 0.8 million bbl/d in 2006, but this includes 0.3 million bbl/d of total liquids growth from the United States that is largely recovery from the losses due to the hurricanes of 2005. Outside of the United States, large new projects are projected to lead to increases of almost 500,000 bbl/d in Angola, almost 400,000 bbl/d in the Caspian, over 200,000 bbl/d in Canada, and almost 200,000 bbl/d in Brazil ( Figs. 5a-5f, International Oil Supply Charts) over 2006 and 2007. These new supplies are being partially offset by declines in many mature fields, such as those in the North Sea, Mexico, Indonesia, and the Middle East.

World oil consumption growth (Figure 6. World Oil Consumption Growth) is expected to increase in 2006, largely because U.S. consumption is projected to recover from a net decline in 2005. OECD consumption growth outside of the United States is expected to remain low. Nevertheless, in 2006 annual world consumption growth is forecast at 1.6 million bbl/d, compared with 1.1 million bbl/d in 2005. This will leave average total world consumption in 2006 (85.2 million barrels per day) about 100,000 bbl/d less than average world production. World consumption growth is projected to increase further to 1.7 million bbl/d in 2007 because of economic growth in developing Asian countries. Chinese consumption growth is projected at about 0.5 million bbl/d per year. Overall, world petroleum demand is forecast to increase by 2.0 percent in 2007, compared to 1.8 percent in 2006. However, greater forecast non-OPEC production growth in 2007 will mean that average total world oil supply will equal average total world oil demand for 2007. "

Now the way I read this is that there will be virtually no increase in production from either OPEC or non-OPEC nations. Further that instability due to Iraq, Iran, and Nigeria will likely continue. I read that as saying that production could likely go down and prices up.

They go on to note that consumption is expected to continue to grow. In fact, U.S. consumption is expected to continue to rise by 1.7% for both 2006 and 2007 - even with higher efficiency and increased use of biodiesel, ethanol, and liquefied gas as automotive fuel sources. It does not speculate on how much gasoline those efficiencies and alternative will replace, but even with them there will be a petroleum consumption increase. That does not seem to be a scenario that would make prices go down in September 2006, or 2007 for that matter.

Now the Bloomberg Energy Prices for 4/13/06 show crude hovering slightly above $69 a barrel - $4 higher than the EIA report. The TFC Light Crude Trading Charts show an 80$ likelihood that it will stay in that same range for May of this year. They predict approximately $75 a barrel by September 2006, and continuing to climb after that. Once again in contradiction to the EIA predictions.

So what are my predictions? I think if production is flat (and there is no reason to think it will increase) then prices are likely to increase. Given that "instability" is likely to continue, and it would truly be a miracle if the projected more severe hurricanes hit this year totally miss the Gulf, it seems that prices would go up. It seems very possible that production could actually go down. After all, Saudi Arabia is at "maximum production" and at some point that must turn downwards. In short, I think we are in the peak oil scenario. Gasoline prices will fluctuate, but continue upwards. The cheery and understated prediction from the EIA does not seem to be even close to what is currently happening - much less for this summer. $2.62 for regular this summer? That might be a bargain.