As early as 2007, oil companies sensed unease in demand growth

Implications: Senior Staff Writer Paula Dittrick reported in the September 15 issue of the Oil & Gas Journal that oil and gas companies’ 2007 global upstream investments totaled $402 billion, unchanged from 2006. The data were published by IHS Herold Inc. and Harrison Lovegrove & Co. Ltd. Lower levels of investment in Canada and the U.S. were offset by higher spending in the Caspian and Russia. Rising royalty rates in Canada contributed to reduced investment there. Asia Pacific investments rose because of China’s increasing natural gas demand plus liquefied natural gas demand (LNG) everywhere in Asia. Upstream spending in Russia and the Caspian region rose 58%. The data was provided by 232 oil and gas companies. Higher prices drove a 10% increase in revenue to $931 billion but lifting costs rose by 17% and the various governments’ take was up 5%. Reserve revisions brought finding and development costs down. Current average U.S. finding and development costs are $22.50/bbl. 

Analysis:  Announced budget increases for 2008 were about 10% above the 2006-2007 levels even with contemplated reductions in Canada because of government action. The budget increases announced by the major oil companies were, to a certain extent, a reaction to public anti-oil company sentiment fomented by nervous congresspersons in a presidential election year. Politicians were, as usual, totally unwilling to accept any responsibility for rising gasoline prices. What took place, as if by magic, was significant reduction in gasoline consumption as consumers found that they were being overwhelmed by multiple economic forces beyond their control. Actual U.S. demand during the first half of 2008 actually fell by around 800,000 bbl/day much of which was gasoline and aviation fuel. Diesel consumption held up somewhat better. Now that the price of West Texas Intermediate has retreated to the $90-100/bbl level, with a consequent reduction in gasoline prices, some consumers will begin to fill up their comfortable low-mileage vehicles again. Many others, now in a severe low-cash position, will remain frugal. It will still be necessary to wait until the end of the third quarter of 2008, to assess the state of the market but what is known as a certainty is that the decline of the world oil stream will continue unabated at 3 million bbl/day/year. So, as of today, it is unlikely that any projects will be cancelled. As for the politicians, they are now confronted with public ire at a general financial meltdown for which they cannot escape responsibility. This brings up an important question for November of 2008. What is the point of having a general election? What can possibly change? When long-standing financial institutions are destroyed, political institutions usually crumble too.