Events are moving faster all the time. Some are highly visible such as the falling stock markets, the steadily rising unemployment numbers and the drumbeat of global gloom and doom emanating from the media.
Others are more subtle such as the drop in the investment needed to sustain oil production at current rates; China’s efforts to corner much of the available world oil supplies during the economic turmoil; and increasing U.S. gasoline consumption in the face of everything else. The only certainty is that we are headed towards a year to remember.
For the present, the availability of oil is not a problem. As the cable financial news assures and reassures us, we are swimming in the stuff. There are said to be 80 million barrels of crude sitting in tankers just off the world’s coasts just waiting to be sold the minute the price goes up a few dollars. Now 80 million barrels may sound like a lot, but it is less than a one day supply for the furnaces and engines of the world.
Chinese oil consumption is no longer growing at 5 or 6 percent annually as it has been doing in recent years, but it does not seem to be dropping significantly either as Beijing is reported to be filling its first strategic petroleum reserve. The Japanese, who just reported a 45 percent drop in exports, imported eight percent less oil in January. The heavily motorized parts of Europe still seem to be consuming close to normal levels as are the oil exporting countries where the oil products are heavily subsidized. The rapid drop in prices has ended the stream of reports from small islands and the poorer Asian, African and Latin American countries about not being able to afford oil for power plants.
In short, it is not obvious exactly where the fabled drop in demand is taking place. The U.S. was down about a million barrels a day (b/d) a couple of months ago, but over the last few weeks consumption of most oil products, except jet fuel, have edged back up again. In a society such as the U.S., which is almost completely motorized, it apparently takes more economic downturn, especially in winter, to keep people out of their cars when cheap gas is available. In another four months, the U.S. vacation driving season will be on us – a time when gasoline consumption usually jumps about 500,000 b/d. Presumably those suffering financial hardships will be more circumspect in their vacation driving this summer even if gasoline remains in the vicinity of $2 a gallon.
If there is anything we have learned in the last 18 months, it is that oil prices are highly sensitive to over and under supply. The conventional wisdom holds that last summer’s $4 – 5 gasoline was mostly the doing of speculation by highly leveraged hedge funds and will not recur in the immediate future. However, most of those following the details of oil prices in recent years believe there was some amount of under supply last summer caused by the pre-Olympics Chinese oil demand spike.
It does not take much excess supply to fill that 80 million barrels worth of floating storage that is bobbing around on the world’s oceans right now. Less than three months during which oil exporters are pumping out a million b/d of excess supply will do it nicely. It has now been about five months since OPEC realized there was too much oil for the demand and began a series of production cuts now totaling 4.2 million b/d. During these five months an endless stream of oil traders stepped forth to proclaim that greedy OPEC members would never really cut production and that oil prices would go still lower due to a drop in demand. So far the traders have been half right. For the last five months oil prices have continued to sag and are currently stable around $40 a barrel. We know there was an oversupply of oil because of the price collapse, we just don’t know how much. While the reporting agencies are circumspect as to the size of the drop, they seem to be suggesting 1 or 2 million b/d.
Earlier this week one of the leading tanker trackers reported that by the end of February OPEC will have cut production by 4.3 million b/d just as they have been insisting all along. Tanker trackers, of course, count the shiploads of oil leaving the world’s export terminals, so it may be months before the impact of lower oil shipments is felt at the pumps.
A 4 million b/d cut in exports takes some time to put into effect. When a cutback is announced, many ships are already en route to pick up cargoes. There are contractual obligations to notify customers that they will not be receiving the expected amounts of oil. There is currently the added complication of an unusually large floating storage to be worked through before smaller oil shipments start driving up prices.
If the report that OPEC exports are really down by 4.3 million b/d is true, we are likely to be seeing some sort of reaction in the form of higher prices shortly. All the evidence suggests that while oil demand dropped last fall, reports from the major agencies, the IEA and EIA, do not suggest that the drop in consumption is as much as the 4.3 million b/d that OPEC is trying to cut. While some of this cutback could be made up from an increase in production from other than OPEC members, supplies from these nations have in dropping for various reasons in recent months.
When substantially lower imports start arriving at the world’s import terminals, all the gloomy oil traders in the world will not be able to stop prices from rising precipitously. Even the usually optimistic are now talking of an economic setback lasting for two or three years. Add high oil prices to the mix and it is obvious that our problems are just starting.
