Exxon Mobil, Chevron, Shell, BP, others alert to crude oil price declines

Implications: Senior Editor-Economics Marilyn Radler reported in the July 21 issue of the Oil & Gas Journal that the International Energy Agency in Paris had released its 2009 outlook for demand and supply. Demand is expected to rise by 860,000 bbl/day to 87.7 million bbl/day. OECD product demand will fall by 1.2% to 48 million bbl/day. Demand will fall by 580,000 bbl/day for North America, Europe and Asia. Non OPEC production will increase by 640,000 bbl/day to 50.6 million bbl/day. However sustained economic growth in Asia, the Middle East and Latin America will continue pushing demand up by 1.4 million bbl/day. Crude oil supplies from non-OPEC sources will push supply up by 640,000 bbl/day. Also in 2009, supplies of natural gas liquids from the Middle East will rise by 810,000 bbl/day. Last month, OPEC added 350,000 bbl/day to 32.4 million bbl/day. By year end 2008, new supply from Saudi Arabia, Angola, Iraq, Nigeria will increase total capacity by one million bbl/day. 

Analysis:  International oil and gas projects that are already budgeted and underway are unlikely to be affected by growing concerns about continued slackening demand. But it is equally certain that 2009 budgets are already coming under scrutiny. The big dogs will not make final 2009 decisions until late in the fall of this year. But high cost projects will come under the microscope. Deep water Gulf of Mexico, Orinoco Tar Belt, Canadian oil sands could easily be jeopardized. International oil men take heart in the knowledge that the vast crude avails that overhung markets in the late 1979 no longer exist. As long as demand stays near the levels of 2007-08, prices may fall but not by much. Should it become clear that poor conditions will prevail for several years as occurred in the 1980-1990 era, budgets for 2009 will be shrunken compared to records set this year when most majors dedicated around $20 billion each to new Capital and Exploratory ventures. Demand in 1980 fell by 3.1 million bbl/day from 1979. Then in 1981, it fell again, this time by 3.6 million bbl/day. By 1983, demand had dropped by a total of 9.8 million bbl/day induced by the rapid run up of crude oil prices in the so called 1972-79 “leapfrog” era. The international oil and gas industry was in a crisis the severity of which easily matched the housing crisis of today. Only in 1990 did the industry recover its poise. A strong psychological component emerges when economies falter because high prices put pressure on the buying power of the average family whether they are Americans, Europeans, Asians or Africans. Today both food and fuel are applying that pressure. If economic factors have not greatly improved all over the world by the end of this year, big trouble is our destiny for the immediate future. Like fame, disaster always awaits in the wings of the global stage. Watch out for it. Be careful.