Why Are Oil Prices up?

Oil prices are up substantially since mid-February. Most of the Mainstream Media (MSM) attribute this run up in oil prices to geopolitical tensions. However, a careful examination of recent supply data provided by the US Energy Information Agency (EIA) suggest a different reason–oil importers are bidding against each other for available total petroleum (crude oil + product) imports.

Since the week ending 2/10/06, average daily US net petroleum imports have fallen about 15%, down about two mbpd. Since the week ending 2/24/06, on a smoothed, four week running average basis, average daily US net petroleum imports have fallen about 8%, down about one mbpd. (A comparable time period last year showed about a 2% decline.)

This sharp decline in net US petroleum imports corresponded to the beginning of the recent run up in oil prices.

It is true that we have relatively high crude oil inventories, but note that we don’t know what percentage of crude oil inventories consists of heavy, sour crude, which cannot be used in light, sweet crude oil refineries. Also, total product inventories are up only slightly year over year. It is quite possible that building inventories of heavy, sour crude oil have been obscuring falling inventories of light, sweet crude oil inventories.

Why is This Decline in Imports Important?

Producing regions tend to peak and then decline when they have used about 50% of their total recoverable conventional oil reserves (Qt).

Kenneth Deffeyes, using a method called Hubbert Linearization (HL), estimated that the world crossed the 50% of (conventional crude + condensate) Qt mark in December, 2005. According to the EIA, December 2005 was the all time record high for world crude + condensate production. The latest data, for January, 2006, show a decline of about 500,000 bpd.

In an article that “Khebab” and I coauthored, “M. King Hubbert’s Lower 48 Prediction Revisited,” we evaluated the accuracy of the HL technique as a predictive tool, once a region has hit the 50% of Qt mark.

As most people know, Dr. Hubbert, in 1956, accurately predicted that US Lower 48 oil production would peak around its actual peak in 1970. Using only production data through 1970, we found that actual post-1970 cumulative Lower 48 oil production was 99% of what the HL method predicted. We concluded that Dr. Deffeyes’ prediction that the world peaked in 2005 should be given a lot of credibility.

In our article, we also analyzed the top four net oil exporters worldwide, and we found that they are collectively farther down the depletion curve than the world is overall. In the article, we had the following statements:

A critical point to keep in mind is that an exporter can only export what is left after domestic consumption is satisfied.

Consider a simple example, a country producing 2.0 mbpd, consuming 1.0 mbpd and therefore exporting 1.0 mbpd. Let’s assume a 25% drop in production over a six year period (which we have seen in the North Sea, which by the way peaked at 52% of Qt) and let’s assume a 10% increase in domestic consumption. Production would be 1.5 mbpd. Consumption would be 1.1 mbpd. Net exports would be production (1.5 mbpd) less consumption (1.1 mbpd) = 0.4 mbpd. Therefore, because of a 25% drop in production and because of a 10% increase in domestic consumption, net oil exports from our hypothetical net exporter dropped by 60%, from 1.0 mbpd to 0.4 mbpd, over a six year period.

We are deeply concerned that the world is probably facing an imminent and catastrophic collapse in net oil export capacity because of declining production and increasing domestic consumption in the top exporting countries.

Consider the simple math. If Deffeyes is correct that the world oil production peaked in December, 2005, then we will use–at our current rate of consumption–more than 10% of all remaining conventional crude + condensate reserves in the next four years.

Why Aren’t the MSM Discussing the Import Situation?

I think that we are seeing an “Iron Triangle” of sorts defending the status quo concept of ever expanding energy supplies: (1) most housing, auto, financing and related companies; (2) Most MSM companies that are selling advertising to Group #1 and (3) some major oil companies, major oil exporters and energy analysts that are working for the major oil companies and exporters.

The housing/auto group wants to keep selling and financing large homes and SUV’s.

The MSM wants to keep selling advertising to the housing/auto group.

In my opinion, some major oil companies are afraid of punitive taxation, and some exporters are afraid of military takeovers. This group of oil companies, exporters and their analysts provide the intellectual ammunition for the other two groups, i.e., promising trillions and trillions of barrels of conventional and nonconventional oil reserves.

Is There a Solution?

There is one important exception to housing/auto group: Mike Jackson, the CEO of AutoNation, is calling for a much higher gasoline tax. While this is a start, I recommend a much higher energy tax, offset by the elimination of the Payroll Tax, combined with a crash electrification of transportation program, as outlined by consulting engineer Alan Drake, see link below.

Jeffrey J. Brown is a petroleum geologist in the Dallas, Texas area.
[email protected]

M. King Hubbert’s Lower 48 Prediction Revisited

EIA Supply Data

Electrification of Transportation as a Response to Peaking of World Oil Production