Just in case you missed it: The Reuters article has been posted on the front page too. Oil Holds Strong Near $45 on Iraq, Russia Not to be missed. Big stuff.

snip - - - OPEC's spare sustainable production capacity shrank to 600,000 barrels a day in July as the cartel raised output in a bid to counter high oil prices, the International Energy Agency said in its monthly Oil Market Report.

IEA says spare capacity is 600 000 b/d (reply):
For some reason I can't reply, so this will have to do. Didn't OPEC say that they can increase their production by over a million barrels per day next year? They also claim that peak won't occur for at least 30 years. Who do they think they are fooling?

I recently read that the water cut for Ghawar was 55%. I think that means that more than half of the liquids coming out of the field are water.

Interesting! But on the other hand, I wonder what you make of this: link

TEHRAN (Reuters) - OPEC can do nothing to douse scorching oil prices when markets are already oversupplied by 2.8 million barrels per day (bpd) of crude, Iran's OPEC governor said on Saturday, warning that prices could fall sharply.
The idea that the market is oversupplied seems odd.

Do not expect opinions or estimates to match. From what I have seen from the IEA, OPEC and others, there appears to be much confusion as to what is actually driving up prices. Within any organization, there can be different estimates developed by different divisions with different assumptions. I know, this problem reoccurs continually as part of my job with municipal infrastructure -- and that should be fairly easy to manage!

So, in the case of someone like the EIA, it is likely that different divisions have different opinions and estimates. I doubt anyone really knows the true numbers.

I wonder where they think all that oil is going? That would imply about 20MMb a month added to stocks in the US (if they took their fair share of the surplus). That ain't happening.

http://tonto.eia.doe.gov/oog/info/twip/twip.asp

I, too, wonder where the oil is going. Commodity traders tend to be very aware of the news...they're risking their own money, after all...so I find the Iranian position hard to accept.

IEA has a number of functions, one of which is administering release of strategic stocks during times of supply disruptions, which they have done on more than a few occasions:

Fact Sheet on IEA Oil Stocks and Response Potential (2004)
pdf
Their site also provides additional information which some may find useful. link

I would expect that during a time of continued supply shortfalls, a plan will be drafted to draw upon these stocks for some time frame.

It would be unreasonable to expect draws upon stocks in the absence of what is perceived to be a temporary interuption to supply.

The alternative is, should oil become scarce to some critical level, with no new supply available to be potentially added, to ration what supplies are available, and supplement that rationing with emergency stock if need be. But really, if you can see the amount of oil available to you decreasing continuously into the future, what are you going to do with the oil you've got????

A few things spring to mind perhaps?

It should be noted that the use of reserves historically been used not only to alleviate severe shortages, but also for political purposes. Namely, to cool off the market, and to stave off panic. While it is obvious that an extended supply shortful could only be temporarily alleviated by the use of such reserves, it would likely to be first response, as opposed to rationing.

The reason for this is that rationing would have to be accompanied by the reasoning for its' implementation (we are at peak oil) which would tend to panic folks. As you imply, hoarding would become more likely (why sell it now, when you can hold it for greater profits later?). It would be far more politically expedient (and remember, most things are done for politically expedient purposes it seems!) to release strategic stocks before rationing. Notice how recently calls were made to release oil from the SPR, or, at the least, stop filling it.

Keep in mind, too, that strategic reserves are quoted in this document at 3.9 billion barrels, which is now likely to be higher due to recent reports of continued reserve fillings. If/when the use of the reserves were implemented to cover upcoming supply shortfalls, say at 2mb/d, that would mean 1,950 days, or 5.34 years. If the drawdown was doubled to 4mb/d, that would mean, 2.67 years.

I have become more sanguine of the prospect of severe shortfalls in the next three years, at least. This, of course, would only be a temporary solution to the underlying problem, but it "buys time", which is what politicians typically do, to keep business as usual. Supply shocks would just seem to be a more usual occurence, with increasing severity. Today (who knows, I could change my mind tomorrow!) I believe the estimates of utter panic in the very near term are overstated, but I also believe business as usual even in the near term is impossible. After 2008, all bets are off.

The IEA numbers seem a little rosey to me...

The data does not really specify what kind of oil & how much of each. In the US though we have around 668 MB in reserves.

However, around 400 MB is sour crude. While sour crude does yield straight run gasoline, and distillate like sweet crude, it's less per volume. But it also produces sulfur, carbon from coking, and assorted deadly compounds which don't really count as an energy source.

The maximun rate we can use this reserve also counts... 4.3 mbpd. In addition, a depletion rate of 2% per year may be a rosy guess as well.

While 2% is reasonable based on historic depletion rates observed, modern pressure injected, advanced recovery fields tend to deplete very rapidly after peak. They still follow a bell curve, but the time line is shorter making the decline more rapid.

Interesting information. I'd also add that we've also reached an historic milestone, in that the role of OPEC, and in particular, Saudi Arabia, as swing producers, is likely over. They are hard pressed to apply any significant market pressure by production increases. That leads us logically to using the reserves as a swing producer role, using the release, or threat of release, to try and cool markets, not for short-term supply disruptions or price control, but to alleviate chronic, long-term, fundamental supply imbalances.

OPEC isn't finished, to say the least, but their power is now dimishing in that capacity. Excess capacity is so tight right now, about the only thing likely to lower the price, is the fall in demand that occurs after prices spike even more, and bringing marginal production on line.

I just can't get over the recent press coverage on Greenspan's call to reduce SS benefits now for future retiring boomers, when we have a much greater, more dire, and earlier crises headed our way.

http://www.abc.net.au/insidebusiness/content/2004/s1187460.htm

Feel free to dissect at your leisure.
I'll go first -



The idea that Saudi didn't invest in additional production capacity is fairly preposterous - the richest oil nation on Earth, with the best oil recovery operations money could buy, COULDN"T AFFORD IT?!?

This reason is frequently given and should not be discarded off-the-cuff.
Saudi Arabia has a growing population, probably not much of an economy other than oil, and faced low-oil prices for many years. Given that they had capacity equivalent to demand, and could control the market with existing production capabilities by turning a spigot, they probably found it much easier to divert money into keeping the population happy rather than investing in unnecessary production increases.

You may be right. However, since SA has historically really the world's most easily produced (per barrel costs of less than $1! Go to their web site if you don't believe me), this would then imply that to increase their production capacity further, would require significantly more expense. This goes along with the idea that the easiest producible oil goes first. Even an order of magnitude of production costs on par, with say the North Sea or deep-water, they could well afford it. But it is nowhere near that expensive, the oil likely just isn't there to produce at levels higher that 10-12 mbp/d. I'm amazed they predict they could produce at a sustained 15mb/d for 50 years...I'd love it if they could do it.

The truth, however, is likely that there just isn't a lot more production to be had. There two latest fields rushed to development in 1998 are only producing about 400-800,000 bpd (off the top of my head). You produce the larger fields first, then the smaller fields. Why would they spend all that money on the highest tech recovery possible and not develop other fields that were easier?

The Saudis own everything from the well, the pipeline, to their massive tanker fleet. They would have produced it if they had it, in my opinion. They do have a massive social program, but have you seen their budget surpluses recently? Seriously. They are completely self-financing. Could they not have foreseen a general rise in demand to this level? Saudi Aramco employs over 54,000 persons...they want to maintain market competitiveness, and shun higher prices that stall demand. They'd want to make as much money as possible, produce as much as the market will bear in their price band, so why haven't they supposedly invested in developement? I fear it's because...it's not there to develop.

For other oil majors, perhaps.

But as for SA, I'm not buying it.

Also, don't get me wrong. I'm not blaming SA:

http://msnbc.msn.com/id/5853718/site/newsweek/

They have an amazing job as swing producer, tempering prices and all. They are trying their best now to jawbone the market until/if they can raise production. All I'm saying is look at the facts, if they could produce more, they would.