Iran Oil Trumps Iran Nuclear

By: Andrew_McKillop

The US Energy Dept's 29 February report on world oil market trends carried baleful news for the gung-ho fraternity who want to turn Iran's nuclear installations into Dirty Bombs before Iran produces the Clean Bombs that other owner countries, like the US, Pakistan, France and Israel proudly possess.

The report outlined that OPEC spare oil production capacity dropped 33% in the first two months of this year compared with same period in 2011. The 12 OPEC member states had an average 2.5 million barrels a day spare capacity during January and February, down from 3.7 million b/d a year earlier. This spare capacity of 2.5 Mbd is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010, but since late 2011 and for reasons only partly related to sanctions, its oil output is falling and Iran's net exports may stand at only 2.2 Mbd today. Some source suggest even less than that.

These figures would make it look like world demand could or might be satisfied, if the spare capacity - nearly all of it Saudi - could be brought on-line. but the US Energy Dept held even worse news.

Its report showed that global oil consumption averaged 3 Mbd more than global output, when Iran is excluded from the calculation, and up to 600 000 b/d more when Iran is included.

DISAPPEARING OIL
The Energy Dept report underlined a basic real world fact: the bulk of oil price increases through January and February is due to supply and demand factors. Iran sanctions could be imagined, by some, to have had a powerful or decisive role in driving up oil prices, but another uncomfortable reality is they played a much less significant role, because world oil supply is faltering but demand is not.

US enthusiasm for Iran bombing can only weaken, aided also by Vladimir Putin's total hostility to any western military adventure against Iran, to hit its nuclear centres and spread radiation far and wide.

Supply side hope is heavily focused on Saudi Arabia which, right on cue, has multiplied its upbeat announcements of expanded oil E&P drilling. The facts are that using Baker Hughes data, KSA had 49 rigs operating in January, compared with 48 in December, and as many as 57 in August 2007, which was the ultimate and possibly final peak of drilling activity in the Kingdom. At the time, and ever since, the official Saudi line is that it both intends to, and is capable of raising oil production capacity - and possibly output - to 12.5 million barrels a day.  Current production is a claimed 9.8 Mbd down from its "more than 10" peak, of a claimed 10.04 Mbd in November 2011. Conversely, Saudi oil consumption at an exorbitant 32.8 barrels per capita each year is only growing, year-in, year-out and is now around 2.4 Mbd, making the Kingdom only just able to beat Russia into second place by net exports, and unable to match Russia's total oil production of about 10.15 Mbd.

Elsewhere in the oil-pumping world, especially in the Middle East, the Maghreb, West Africa and East Africa production slowdowns and cuts are legion. Libyan supplies, which were "rebounding" from their near-zero during the NATO bombing campaign, have slowed their recovery pace, and remain about 460 000 b/d lower than the 1.6 Mbd of January 2011 before the uprising began. Yemen and Syria, which have near-totally destabilized economies, have caused about another 600 000 b/d to be lost, while the North Sudan/South Sudan conflict and ongoing but low-level conflict in Nigeria's delta region have shut out at least another 500 000 b/d.

DEATH OF THE BIG EXPORTERS - THE ONRUSH OF SMALL FRY
Producer country decisions are always driven by a mix of different factors - from political and economic to geological and industrial. The current top six net exporters—Saudi Arabia, Russia, Iran, UAE, Venezuela and Norway —account for at least a half of world net oil exports. Earlier in the first decade, around 2005, the split of factors tending to erode their net export capacity - or actually eroding it - was domestic oil demand growth. Along with production loss not only through depletion but also through gas production raising in the case of Russia, Iran and Norway, this resulted in the Top 6 group showing a 2005 average annual decline rate for net oil export capacity of about 3.3%.

Today's rate for the group as a whole is still only about 3.3% per year, but will rise and for reasons that are all bad for oil importers. Depletion loss is now at least as important as domestic oil demand growth in cutting their net export capacity. Iran, Venezuela and Norway are in clear long-term production decline, due to depletion, and their net oil exports will almost certainly go on falling: rapidly for Norway, slower for Iran and Venezuela. Production decline is coming for Russia, but higher domestic oil consumption and more investment activity in gas than oil will likely drive the fall of Russian net oil exports, or prevent any growth of exports. This leaves KSA and UAE, with KSA data difficult to crosscheck and verify, but it is certain that UAE's net export capacity is very unlikely to grow.

This group of countries has more than one-half of today's world oil export capacity.

Today's emerging global oil picture as the IEA shows in many reports, is more fragmented. More smaller exporters are taking the place of the flagging giants, but their combined oil export capacity is unable to match the lost export capacity of the big exporters. As the chart above from an Energy Bulletin article by Jeffrey J. Brown and Samuel Foucher (Jan 2008) shows, small net exporters can rapidly shift back to oil-importer status. The change is almost overnight.

For the UK its production rate decline of around 7.8% per year average from Year 2 = 2001 resulted in a rate of export capacity loss of 55.7% per year, showing that things change fast with small producer-exporters on the decline, as well as on their initial pathway of growth upward to short-term net oil exporter status. Norway's current rate of production decline is comparable to the UK rate.

The hunt for any oil production capacity is therefore the main driver, explaining the new Scramble for Africa by the world's oil majors and the NOCs of Emerging countries, and also the majors' policy shift to gas. Cheap shale gas and stranded gas, they are betting, could allow and enable GTL/gas-to-oil conversion to produce synthetic oil perhaps cheaper than depending on increasingly expensive, hard to extract oil. This may be so, and it also might not.

Our concern is the outlook for oil in the near-term future. In the period to 2017, the factors above can easily produce a 1970s-style oil shock, this time with at least tacit support from international oil and energy companies, all of them facing huge capex needs and all of them needing high and stable oil prices. The countdown to this event is now engaged.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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