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Catching a Falling Financial Knife

IEA Still Drumming For High Priced Crude Oil

Commodities / Crude Oil Oct 14, 2012 - 11:09 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleThe IEA's latest Oil Market Report, released 12 October, maintains the IEA storyline of global oil shortage and extreme high prices being almost certain - by about 2017 - unless and until the 28 OECD member countries of the IEA enact and pay for a whole range of new energy policies and programs.  For a flavor of these heavily promoted big-spending policies and programs from the IEA, high level conferences like its 'Clean Energy Future' ministerial meeting held in London, 25 April (for which the IEA Web page no longer exists) provide all that is needed.


At that meeting and similar ministerial-level get togethers, the IEA pushes for OECD spending on what it calls "new energy" that it costs at $5 trillion by 2020.

There is of course the inevitable dire crisis of global warming to fight. The IEA's deputy director Richard H. Jones has no problem saying global average temperatures "will probably rise by at least 6 degrees centigrade by 2050" http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/8221271 but also says that big spending on New Energy could or might mitigate that outright disaster. Apparently, nobody at the IEA told Jones what +6 degC would do to world sea levels and energy demand in the flooded cities that resulted from this fantastic and impossible temprise - as if that concerned Jones!

To be sure, the IEA says, apart from the renewables there must also be flat-out development of shale gas, stranded gas, shale oil, tarsand oil production, condensate oil production, gas-to-oil conversion, even coal-to-oil conversion and of course biofuels to meet the giddy pace of oil demand growth. Even if there is no trace of oil demand growth since 2010, perhaps 2008, it will surely come back to haunt us. Coal-fired electric power will also be OK, says the IEA, if continental scale carbon capture and sequestration is rapidly developed, with of course 24/7 trading of carbon dioxide dumping sites and pipeline availability. Everything is possible if you throw enough money at the problem and consumers supinely go on paying sky high prices for oil energy!

WHERE IS THE DEMAND?
Oil is the real and first raison d'etre of the IEA. Its was founded on a so-called "initiative" by Richard Nixon and Henry Kissinger in the wake of the first Oil Shock of 1973-74, as a second-best instead of what they really wanted: to invade Saudi Arabia. The IEA was set, by them, to play divide-and-rule tactics with oil exporter countries, especially Arab OPEC members plus Venezuela, bidding down oil prices on a cargo by cargo basis and producing the right kind of distorted information to show oil demand was falling, thus limiting prices. It was also set by them to build and manage, and exaggerate the size of national strategic oil stocks in IEA member countries, to the same aim of levering down oil prices by showing there was no shortage.

It is therefore a massive irony that, today, the IEA shills up oil demand and tends to under-report oil stocks, while it promotes the increasingly unreal notion that oil prices can easily attain $150 per barrel.
In 1974, after a massive round of price hikes totaling 350%, oil was priced at $12 per barrel.

The IEA's new role - of distorting oil data to drive up oil prices and keep oil prices high - could be analyzed several ways, and generously interpreted as nothing to do with OECD-resident bankers, brokers and traders, oil producers, shippers and refiners, oil distributors and even governments who can and do profit from high prices in a large number of ways. The generous interpretation almost inevitably draws on the James Bond 007 origins of the IEA. Broadly speaking, the IEA would be playing its high oil price shill role "to warn the West" of geopolitical threats to oil supply, from the Middle East and perhaps Russia.

An example of this generous explanation of the IEA's present stance is this extract from a recent paper published in the EER review by analyst Matthew Hulbert, with good inside knowledge of the IEA:

"Lulled by dreams of energy independence, the US thought it could slap sanctions on Iran without having to pay a price at the pump.  Now, rather than abandoning its Iran policy, the US is relying on Saudi Arabia and the Paris-based International Energy Agency to bring down oil prices and prevent the world economy from going under. ...(T)his is a highly risky policy which could seriously hurt the credibility of both Riyadh and Paris. Until the US ditches its energy independence myth and gets back to current reality, the Saudi-Parabia ("Parabia" meaning other Arab Gulf States) ship is going to struggle to make it to port over the next decade." http://www.europeanenergyreview.eu/site/pagina.php?id=3767

Because this is James Bond stuff with plenty of psywar to fool the Bad Guys, the IEA firstly has to talk oil prices up as high as it can, to protect us all! What has the real world got to do with this film script, or low grade scifi story? As we know Saudi Arabia's oil minister al-Naimi never loses the opportunity to say that $75 oil is fine for him and more than that is not justified. In recent weeks, Saudi oil tankers have been urgently dispatched to the US to help squeeze gasoline prices back under the magic $4 a gallon level, but we should not be fooled.  Europeans however are not so lucky, with pump prices around $8.50 - $9 a gallon, including up to 65% of that price paid as tax to governments.

The US has torn up the OPEC supply dependence script, and genuinely believes it can now rewrite and reshape world energy through becoming the 'West's new Middle East', ramping up its domestic oil production, exporting gas and coal. In the meantime, however, times are mean and Iran is a terrible threat to both the West and to Saudi Arabia/Parabia. Simply for that reason, oil prices must be maintained just as high as possible. What could be more logical?

STILL NO ANSWER
This still does not give us answers to where the oil demand is coming from. The above regular grade geopolitical spy thriller scenario is almost entirely supply side-based. It presents supply as declining and/or geopolitically threatened, which in many ways fits closely to the IEA's real origins and real raison d'etre. It does not fit with the present and ongoing reality of world energy that the IEA, despite its self-defined role of talking up oil prices anytime and any way it can, is also forced to report.

Global oil demand growth is almost zero and at any time can tilt to contraction on a quarter-by-quarter or even yearly basis. Oil supply, conversely, is growing. Non-oil energy sources, systems and supplies are growing very rapidly. This is a context that is very hostile to high oil prices.

This week's IEA Oil Market Report followed three days after the 9 October report also from the IEA, which either by schizophrenia or through James Bond Oil Strategy (take your pick) heavily shilled oil production growth prospects in Iraq.To be sure, the IEA says, Iraq will need $530 billion of oil sector investment to 2035 but in return for this will become the world's second biggest oil exporter pushing Russia into third position. Even in the next 5 to 7 years, the IEA says, Iraq's oil export supply capacity can double from current levels reported as 2.56 million barrels a day, by Al Arabiya News.   http://www.iea.org/newsroomandevents/pressreleases/2012/october/name,32060,en.html.

The latest IEA Oil Market Report was forced by the reality of a flat-line world oil demand growth outlook to yet again revise down its estimates of world demand growth for current year 2012 and for 2013 by 100 000 barrels a day, each year, relative its own estimate of September. The main argument used for this now serial reduction of demand growth estimates - to levels increasingly tending towards pure and simple zero growth of world demand - is that economic expansion is "slower than expected and forecast", notably as estimated by the International Monetary Fund, which itself is now engaged in serially cutting its global, regional and national economic growth forecasts.

While the IEA is forced by stubborn reality (AKA fundamentals) to supply world oil data which can suggest that global demand has in fact not grown, at all, since 2010 and probably not since 2008 it bravely continues to forecast growth - in the future. It presently says that worldwide fuel consumption will rise to a year average 95.7 million barrels a day in 2017 from 89 million in 2011. It now also has to forecast that world oil output capacity will advance about 1.5 million barrels a day each year to 2017, attaining 102 million barrels a day.  Even 3 months ago, the IEA painted a picture of 2017 as the oil equivalent of Mayan December 2012 doom; in many publications and interviews by its imaginative chief economist, Fatih Birol, it claimed 2017 oil prices can easily exceed $150 per barrel.

Both the present demand and supply estimates and forecasts are theoretical and increasingly unlikely. On the demand side the arguments are good that peak oil demand on a worldwide average daily basis is firmly set in the rearview mirror of recent time - probably in 2008 - but well hidden by the data spin used by agencies not only including the IEA, and by the large number of other players who need to talk up oil prices. On the supply side the likelihood of global net supply decreasing, not only due to lower oil prices, is the best hypothesis. This of course will tend to create very sharp price rebounds each time oil prices are set - by fundamentals - into a downspin or trend. Overall, oil prices will decline from current levels but the ride will be erratic and volatile to say the least, helped a lot by the vested interests in higher oil prices.

THE TIRING DETAILS
In its October oil report the IEA congratulates itself on getting funded, by Norway, to run a major study on world NGL-natural gas liquids production and use http://omrpublic.iea.org/ngl2010.htm
The NGL story, with its basically unknown real role in world liquids supply (the IEA says "about 13% of global oil supply in 2009") is only one of the unknowns - making it even harder to claim that world oil supply is limited but demand is rising. Basically, on NGLs: is this oil energy or gas energy?

Another problem for the IEA claim of rising demand is that global demand, certainly since 2008-2009  is set in a tight range of 88 - 89 million barrels a day, but no more than about 83.5 Mbd of this is oil energy supply, due to world petrochemicals taking at least 4.5 Mbd. The IEA's October report said that in 3Q 2012, world refineries took in an average 75.8 Mbd, an awful lot less than the "headline number' for world demand of about 89 Mbd. World oil production losses, and transportation losses in all forms of transport from tankers and pipelines to rail and road transport, are basically unknown but could be as high as 1.5 Mbd. To what extent is this lost oil reported as consumed oil? Are losses increasing or falling? Other well known players in making oil numbers as slippery as the oil they concern, include refinery gains on processed crude, roughly 43.5 US gallons of products coming from a 42 US gallon standard barrel of crude.

This last factor - crude oil "expands" by volume with refining - makes it hard to compare crude oil producer and supplier data with finished product end user oil data. One interesting aspect of the claimed or supposed new US policy of rewriting and reshaping world energy, with it as a major supplier and exporter, is the US is already a fast-growing refined products exporter, but a relatively fast declining net importer of crude oil. Obviously US domestic demand is either flat-line or falling.

When we turn to oil trading, the above selection of some boring technical details pale into the background relative to oil over-estimating and counting in national statistics of the majority of states, usually for fiscal and revenue grubbing reasons. Oil volume over-counting or exaggeration is also the name of the game in oil trading and oil payment offsets, but also sometimes the opposite plays. The overall impact is to make any kind of claimed precision on world oil demand - the IEA says its numbers are accurate to "about 0.1 Mbd" - the snakeoil that it is. Certainly growing petrochem and non-oil energy demand, and probable or certain declining oil energy demand backs the downside forecast for net total oil energy demand, and is the best hypothesis going forward - which the IEA does not like. Its October report said that September Brent prices averaged $113.03/bbl and WTI $94.56/bbl but within 2 months these can be receding memories of a high oil price past, no thanks to the IEA.

By Andrew McKillop

Contact: xtran9@gmail.com

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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

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.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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Catching a Falling Financial Knife