ExxonMobil, Chevron, Shell, others gird for tough times ahead

Implications: Jad Mouawad in New York reported in the October 3 issue of the International Herald Tribune that rising oil prices this past year have taken a toll on the global economy. But lately with crude oil prices dropping fast, billions of dollars and euros could again find their way into the pockets of consumers. Ben Bernanke while warning of the many stresses on the economy noted that the recent oil prices were a positive factor. Oil is now trading in New York at $94.75/bbl. Consumers welcome the decline but producers are wary. Mexico may have to cut next year’s budget as petroleum revenue dwindles. Russia and Venezuela may have to reduce ambitious energy projects that require financing. Experts now believe that various factors will continue to drive crude oil prices down for months. Bernstein Research estimates global demand will fall by 1.3 million bbl/day this year which will be the steepest decline since 1982. The drop in prices could lead to industry consolidation.

Analysis:  The great worry among all observers is that the world could fall into a slump like that of 1980-1985. Then, like today, various forces, many of them arbitrary, drove crude oil prices to a high of $40/bbl (Bonny Light) in early 1981. But demand for crude oil had already started down. From 62.7 million bbl/day (black oil) in 1979, by 1980 demand had already fallen to 59.7 million bbl/day. Crude oil prices began to decline in the second half of 1981 and continued falling all the way into 1986 when rock bottom of $9.85 was reached in July. Crude oil demand hit bottom the year before in 1985 at 53.4 million bbl/day. It was only in 1996 that crude oil production exceeded the peak demand year of 1979. Only in 2004 did prices begin their meteoric ascent which caused distress for consumers everywhere except those nations where fuel prices were subsidized. What is different this time is that there are few excess avails. In 1980 surpluses were variously estimated at 5-10 million bbl/day. Those avails caused an immediate reduction in capital and exploratory budgets which lasted several years.. The years 1985-1990 saw extreme consolidation not only among oil producers but also among the myriads of service companies.By 1990, most of the surplus avails had vanished. Today the major international oil companies have dwindled to six. But national oil companies like Gazprom, Saudi Aramco, Kuwait Oil Company, National Iranian Oil Company, Petroleos Mexicanos Petroleos de Venezuela, Petroleo Brasileiro, Sonatrach, Sonangol, Nigerian National Petroleum Company and Abu Dhabi National Oil Company have risen in prominence and now, through OPEC, can often affect crude oil supplies. The World Oil Balance is reported monthly by the Oil & Gas Journal. Demand is given by quarter for the OECD nations (Western Europe, the U.S.A, Japan, etc) plus that of the non-OECD nations (China, FSU, etc). Supply is also given on the same basis. Crude oil inventories in the OECD nations have fallen steadily since 2006 and continued into the first quarter of 2008. But it appears that oil inventories may have built in the second quarter. Total worldwide supply today is 85.4 million bbl/day which includes black oil, natural gas liquids, Canadian oil sands, Orinoco Tar Belt oil and biofuels (mainly ethanol). Demand during the first quarter was 85.88 million bbl/day. If worldwide demand has indeed recently fallen by 1.3 million/day, then surplus avails exist in the amount of about one million bbl/day. OPEC shut ins, plus postponements in Canadian oil sand developments will immediately begin addressing the surplus. If it continues into 2009, majors and independents will cut capital and exploratory budgets. Crude oil prices will stabilize quickly at around $100/bbl, perhaps even higher. Don’t bet on $1.50/gallon gasoline anytime soon. Note that the above does not take into account current Gulf of Mexico shut ins due to Hurricane damage.