On the Rise

Rising Consumption, Stagnant Production and Low Reserves Means Oil Prices Will Stay High Analysis By Peter Zeihan Special to ABCNEWS.com Sept. 22  If you think the price of oil is high now, just wait a few months.

Rising energy consumption, stagnant production of crude oil, low reserves and bottlenecks all along the global supply chain will combine to keep prices at current high levels, $35 to $40 per barrel, until spring  even if Saudi Arabia increases production, as its government has promised.

The entire world supply and delivery system is so strained that any disruption, such as a conflict or major labor action, would push prices even higher. The world will probably see $45 barrels of oil soon.

On Sept. 18, Saudi Arabias Crown Prince Abdullah bin Abdel Aziz, the countrys heir apparent, said that his government would increase oil production immediately to bring down prices. But any increase by the Saudis will only barely keep pace with surging demand.

The stage is instead set for a very tight oil market in the coming 12 months. Only the Saudis  now pumping about 8.5 million barrels daily  can pump much more, about 2 million more barrels per day. But global consumption is rising and winter weather alone will boost the use of oil by about 1 million barrels every day.

From oil fields to refineries and shipping terminals, the global petroleum system is nearly at full capacity as it is. The 1998 slump in oil prices soured petroleum companies from making new capital investments. While many new projects are underway  from the west African coast to the Gulf of Mexico  only a handful will come on line soon, most likely in fields in Central Asia by 2002.

World Reserves Running Low

Around the world, stocks of reserves are low. The U.S. reserve amounts to less than a 60-day supply. Heating oil stocks are down 20 percent. Refineries are nearly running at full capacity. The United States is the worlds largest refining nation and its refineries are running at 90 percent of their capacity.

The system for shipping oil couldnt handle much more oil, even if it was pumped and refined in a timely fashion. The price of using ocean-going tankers has doubled in the last two years, as old ships have been scrapped and new ones havent been built.

With little margin for error, the global petroleum system is now susceptible to disruptions and dramatic price spikes. Significant oil spills, shut downs due to weather as have occurred in the Gulf of Mexico, or protracted conflict can cause the price of oil to rise. In Colombia, for instance, bombings have repeatedly shut down a major pipeline for weeks on end.

Peter Zeihan is an analyst covering international energy and economics issues for Stratfor.com, an Internet provider of global intelligence.

http://www.abcnews.go.com/sections/world/DailyNews/stratfor.html

-- Cave Man (caves@are.us), September 27, 2000

Answers

BUSINESS

JERRY HEASTER: Cost-cutting tactics add to oil woes

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By JERRY HEASTER - Columnist Date: 09/26/00 22:15

If the raid on the Strategic Petroleum Reserve was designed to push down oil prices, it's the worst long-range energy policy imaginable.

As much as U.S. consumers may enjoy relatively low-priced gasoline, diesel fuel and heating oil, the inescapable fact is that the greater the effort to tamp crude prices, the greater the probability of severe oil shortages in the not-too-distant future.

Nor will it help any short-term problems. The addition of 30 million or so barrels of oil from the strategic reserve isn't likely to affect availability of any petroleum-based products. Domestic refineries are running at an estimated 96 percent of capacity, which means adding to oil stocks is of little practical benefit to consumers.

The industrialized world's real problem is that prices may remain too low to restrain wasteful consumption and encourage needed production. As for today's prices, the current cost of gasoline is still comparable to the early '70s when adjusted for inflation and fuel tax increases since then.

Matthew R. Simmons, president of Simmons & Co. International, recently wrote a lengthy analysis of the oil industry's current situation compared with conditions during the first oil shock, and his conclusions are alarming.

"We are far more vulnerable today to a petroleum shortage and the resulting consumer hoarding than we were in 1973," warns the Houston-based industry veteran. "In fact, we were better prepared to handle an energy crisis in 1973 than we are in 2000."

Over the past two years, Simmons notes, the industry has experienced the biggest oil price collapse of the postwar era, followed by the sharpest price rise and biggest drawdown of oil inventories since the mid-1970s. These developments, he said, mean the industry is working with inadequate data when trying to anticipate supply-demand contingencies.

The most dangerous assumption, he says, holds that oil is less important in the new economy, which he calls an illusion. While oil use has declined as a percentage of economic output, the numbers are deceptive.

The only actual decline in oil use resulted from less of it being used to generate electricity, combined with greater reliance on electricity for residential heating. Electricity, Simmons points out, had the steadiest growth of all energy sources and this growth "finally has used up all other forms of generating capacity not fired by oil or natural gas," thus exhausting this perceived "surplus" cushion.

Meantime, the hard-won gasoline mileage improvements have been squandered on America's growing love affair with behemoth gas guzzlers. While the number of cars has increased from about 100 million to 130 million from 1973 to 2000, Simmons estimates, the sport-utility-vehicle-inclusive "truck" fleet has soared from 23 million to more than 80 million.

The end result is that motor vehicles consume 50 percent more oil than they did in 1973, and this has happened because oil remained too cheap to encourage prudent consumption.

The resulting waste of this precious resource has put Americans in a tighter energy bind than they realize. If oil stays cheap, the squeeze can only get worse.

http://www.kcstar.com/item/pages/business.pat,business/3774ca2b.926,.h tml

-- Cave Man (caves@are.us), September 27, 2000.

Full Speed Ahead for Oil Refiners (and Stocks) By Rick Olivere, CFA CNS Financial Analysis from IdeaAdvisor.com September 27, 2000

The addition of 30m barrels of oil from the Strategic Petroleum Reserve over the next 30 days does not address the fact that refiners are operating at near full capacity already and may be subject to routine maintenance shutdowns. The US Department of Energy estimates that heating oil inventories are 19% lower than a year ago and that inventories on the East Coast are 45% lower than this time last year.

As the US heads into the winter heating season, refiners have been operating at near full capacity during the summer driving season -- 94.7% last week -- to meet gasoline demand. As a result, routine maintenance has been postponed. We believe this suggests that profits from refining may exceed analysts' expectations for the upcoming third and fourth quarter.

We reiterate our Buy recommendations of two major independent refiners: Valero Energy [VLO: NYSE] with a target price of $50, and Amerada Hess [AHC: NYSE] with a target price of $80.

Inventories of heating oil now reflect the use of just-in-time inventory practices by both independent refiners and the refinery operations of major oil companies such as ExxonMobil so that inventories now approximate three weeks of demand. Industry analysts estimate that 20 years ago, refiners kept two to three months of heating oil inventories on hand to meet spikes in demand during the winter.

When oil prices rose in the late 1980s and early 1990s, refiners concluded that the cost of capital of maintaining these inventories was too high. Put another way, refiners concluded that too many dollars were tied up in inventories. As a result, computer programs are now used to maintain inventories that approximate three weeks of estimated demand.

Just-in-time inventory management practices are being applied to the refinery business as they have in other manufacturing businesses. The consequence, however, is likely to be demand for heating oil from refineries outside the US to meet any sharp increase in demand resulting from cold snaps.

WEFA, an economic consulting firm in Massachusetts, estimates that refineries in Asia are running at 80% of capacity and that some refineries in Singapore are operating at rates as low as 50%. Thus, there is global capacity to meet heating oil demand in the US, but transportation costs will make it expensive.

Refinery capacity in the US has declined from approximately 19m barrels per day (b/d) to an estimated 16m b/d as a consequence of the Environmental Protection Agency's stringent rules on production. Volatile oil prices over the past three years also resulted in wide swings in profitability of refinery operations so that new refinery capacity has not been built in the US.

We believe this imbalance between refinery capacity and demand for refined oil products offers an opportunity for profits in shares of companies with significant refining operations such as Valero and Amerada Hess.

http://www.cnsnews.com/ViewBusiness.asp?Page=\Business\archive\200009\ BUS20000927b.html

-- Cave Man (caves@are.us), September 27, 2000.

The mighty oracle CPR will defend us from these ridiculous oil prices! HEAR the great CPR, and OBEY! For HIS is the wisdom of the ages!!!

... NOT ...

-- no one here (-@-.-), September 27, 2000.

DOWN AGAIN THIS AM AFTER A ***** two cent rally yesterday?? *****

READ ON DUMMIES...........LOLOLOLOLOLOLOL.

Oil Eases, Saudi Says Over $30 Too High
September 28, 2000 6:18 am EST

LONDON (Reuters) - Oil prices eased on Thursday after assurances by Saudi Arabia, the world's biggest producer, that it would pump whatever volume needed to quell this year's relentless price rally and bring stability to the market.

"The kingdom is willing and ready to offer the amount necessary to stabilize the world oil market," Saudi Crown Prince Abdullah told a heads of state summit of the OPEC producers' group in Caracas, Venezuela.

London Brent crude futures slipped 48 cents to $30.06 a barrel and U.S. light crude was off 36 cents at $31.10.

Prince Abdullah, who has day-to-day charge of OPEC's dominant power, called on crude importing nations to play their role in easing sky-high prices by reducing taxes on fuel.

Saudi Arabia previously has said it would prefer $25 crude.

He added that he feared the world economy might be harmed if the current price spike, which has seen crude above $30 a barrel for much of the year, should be prolonged.

"We are worried today by the increase in oil prices which if continued permanently could lead to a negative impact on the world economy and the prospects for world economic growth," he told other OPEC leaders.

"We call upon consuming countries to share the sacrifice through the taxes that they impose on oil...We are unfairly blamed for all the problems of the world economy."

The Organization of the Petroleum Exporting Countries has come under pressure from consuming nations across all continents to boost oil supplies and provide some relief to escalating energy bills. OPEC has lifted production three times this year by a total 3.2 million barrels per day (bpd), but with little success in bringing down rocketing oil, which earlier this month hit a 10- year peak at $37.80 in the U.S.

Prices have since eased, a decline largely triggered by a rare U.S. decision to tap into strategic reserves for 30 million barrels of crude to shore up supplies for the upcoming winter.

The U.S. oil is due to be released next month, bringing one million bpd to the market, in addition to the extra 800,000 bpd promised by OPEC from October 1.

But the release order by President Clinton has come under domestic criticism from Republicans for being a political move to help presidential nominee Al Gore in November's election.

Republican lawmakers said on Wednesday they were looking at legislation to try and stop the White House from releasing stockpiled oil, although analysts doubt they will be successful.

U.S. SAYS STRATEGIC OIL RELEASE PRUDENT

Clinton has defended the oil release as the most prudent move to steer prices toward OPEC's target range of $22-$28 a barrel.

"The accumulated (OPEC output hike) decisions were not going to come near the target and there seemed to be a trend line going quite high," he said.

This year's price spike has mainly been driven by fears of fuel shortages in the United States, which consumes a fifth of world petroleum supplies. U.S. crude and refined product inventories stand near 24-year lows.

The U.S. initiative to tap strategic supplies has prompted the European Union to consider whether to unleash some of its own contingency stockpiles, but some member countries are opposed saying the inventories should be used for emergencies not for managing oil prices.

The West's energy watchdog, the International Energy Agency (IEA), has called an emergency meeting of its governing board on October 4 to discuss the world oil market situation.

The Paris-based IEA groups 25 industrialized countries and is responsible for coordinating joint measures to meet oil supply emergencies.

-- cpr (buytexas@swbell.net), September 28, 2000.