UV Market Blogs

Saturday, October 21, 2006

The oil situation

The oil situation

OPEC agreed on Friday to cut production of oil by 1.2M barrels per day.  That’s 200,000 or 20% more than expected in cuts.  The original cut was expected to be just 1M barrels.  Some OPEC leaders went as far to say that another 500,000 barrels of oil will be taken off the daily production when OPEC meets again in December.

Recently oil has taken a considerable tumble from the sky high $75 a barrel to just $57.  OPEC has decided to cut back on production in order to push oil back to the previous highs.

Oil is a tricky subject:

Everyday, 82M barrels of oil are produced and sold on the worlds exchanges.  Of the 82M barrels in production, 80M are used immediately to supply the world’s ever increasing thirst for oil.  The remaining 2-3M barrels are usually heavy Saudi crudes which cannot be easily converted into usable energy forms such as gasoline.  This crude usually comes from very sandy ground which is essentially tar.

In simple terms, all the oil that is produced is used up almost immediately.  There is really no room for comfort when it comes to oil.  OPECs 1.2M bpd cut could send oil prices up more than the oil actually represents of daily production.  Assuming that 82M barrels are produced daily, a 1.2M bpd cut would drop the production of oil 1.25%.  However prices would most likely rise 4-5% or even more.  Because oil demand is so tight, the gains and losses are heavily leveraged.

Even when oil is $75-80 a barrel the demand for crude stays the same.  Oil and energy are so much a part of our daily lives that we have come to the point of paying whatever we can in order to get it.  When gasoline was $3.50 in my town, I saw no more bikes on the road or less cars on the street, I did however, hear more complaining and threats of going on a “gas strike.” The fact is that oil is worth more than $75 a barrel.  It has been previously said that a barrel of oil is worth 10,000 man hours of labor, which in the US would cost $51500 even at minimum wage.

I can’t perceive a lesser demand until oil tops $100 maybe even $125 per barrel.  We are so energy dependant that money becomes no object when we talk about gasoline and our oversized cars.  The only solution to lessening prices is to lessen demand.