Oil, again

[Cyrus]

Some statistics your way :

Crude oil reserves, at the end of last year, stood at the equivalent of approximately 40 more years of production, if production remains at 2004 levels. You get that figure by dividing the total known 2004 reserves of crude oil by the 2004 production - which is 1,200 billion of barrels divided by 80.2 million barrels.

This reserves-to-production ratio (40 more years) actually fell in 2004 (it was 43 years in 2003) despite the fact that reserves continued to increase last year and are now some 17% above the 1994 levels. But production is now 20% higher.

Oil production increased by more than 3 million barrels daily in 2004, the largest increase since the mid-1970s. OPEC accounted for 2 /3rds of that increase.

Oil refinery capacity worldwide, despite the many closures and mothballing of the last decade (due to low or non-existent refinery margins), actually increased to 84.5 million barrels daily, up some 1% from the previous year. It was 75 million barrels daily in 1994. So capacity is up.

So is utilization of refinery capacity. Oil refineries operated, on average, worldwide, at 87& of their capacity, which is the highest level for at least the last 25 years. When you think of the unavoidable losses in utilization due to maintenance, accidents, etc, the figure represents something close to “full” utilization.

Oil consumption rose worldwide – you could say dramatically, although we will soon see higher increases than last year’s. In 2004, oil consumption was 80.7 million barrels daily. That includes all oil products consumed, both inland and internationally, ie bunkering and aviation, and also refinery losses (also crude oil used directly as fuel). The rate of worldwide growth in consumption was 3.4% which is the strongest seen since 1978. It was above the 10-year average in every region of the world. The Asia-Pacific region accounted for 50% of the growth on oil consumption the last ten years.

Detail : The products with the highest growing consumption (demand) were the so-called “middle distillates” which are mainly Gasoil. They accounted for half thr world growth in consumption, which China the main “culprit”, due to its phenomenally rising transport and power generation needs. Chinese mostly burn diesels.

The United States continues to be a voracious consumer of petroleum. The US produces some 7.2 million barrels daily and imports another 13 million barrels more, which brings its consumption level at a little more than 20 million barrels daily, easily the highest for a single country and more than the whole of Europe or the whole of Asia-Pacific (incl. Japan, China, etc).

So why are they not building more refineries ? Or getting refineries out of the mothballs ? Because either building a new refinery or re-starting an old one is a very costly affair. It does not make sense when you combine the above data of phenomenal demand with the current refinery gross profit margins, which (at between 4 and 6 dollars per barrel processed) are at the highest levels the refiners have seen for more than 15 years (if you exclude a 2000 spike in US refineries’ margin).

There are two answers and these you will not find in most analyses. One is “bad”, and the other is “good”. The “bad” explanation for not seeing a rush of new refineries getting constructed is that, well, the oil companies are all in cahoots! They want prices and margins to remain so high, since they can already meet worldwide demand, in order to continue to make out like bandits.

That’s the conspiracy theory. It is weak on many levels, one of which is that not even countries (as opposed to oil companies) are going for new refineries, not in any significant manner. Except for the “natural” development whereby Saudi Aramco opened up a refinery in China some years ago, there are not many new refineries around.

The “good” answer is the one you will more likely hear in the corridors – but you gotta take the elevator to at least the seventh floor : Oil companies do not expect the current high levels of prices and margins to last more than one or two years down the road. The reasoning behind that doubt is that demand is already been met, that prices are high also for “artificial” causes (Iraq, etc), that there is a big amount of speculation in the commodities markets, etc. Therefore, it does not make financial sense to build or re-open a refinery when the refinery margins, along with oil prices, are gonna revert to their “historical levels” – whatever these are.

That’s it.

...Now burn, baby, burn.