Seeing as no-one gives a crap about oil bubbles let me go off topic about a new blog I ran across:
http://diezmillones.blogspot.com/
Yeah, thats right - a blog named for the ten million votes Chavez aims to get in December. They actually have a poll where you can vote on how many you think he'll actually get. The lowest choice though is 9.5 million! A pretty optomistic blog I would say.
Optimistic or not...I think I can see why he wanted to peg the price of oil at $50/barrel.
All those oppos who keep trying to convince us that Chavez is just some crazy, arm-waving buffoon are looking sillier by the minute when I read stuff like this.
(Not that they didn't look damn silly to me already... )
Without a doubt the oil $22 to $28 price band Ali Rodriguez had OPEC adopt looks rather quaint right now
A 45 to 55 or 50 to 60 band would be realistic. But OPEC needs to start cuting back now or they're likely to wind up on the wrong side of those numbers soon.
There might be a bubble burst in the near future but the trend in the mid/long term is still bullish. I don't see oil falling below 30 though, that was the price before Iraqi production was cut in half.
"Without a doubt the oil $22 to $28 price band Ali Rodriguez had OPEC adopt looks rather quaint right now"
This looked pretty good at the time. Another reason for being cautious of prices in the 40-60 range in the long run is that it become economical to produce expensive oil i.e. tar sands in Alberta and more deep sea drilling. But do not forget another OPEC fear of too high oil prices (and Saudi Arabia ponders this from time to time), high oil prices give powerful incentive to save oil and ivest in alternative technologies.
7 out of ten barrels in the US are used for transport. There are several potential long term fixes that would reduce this. Although fuel cells will not be viable for decades, hybrid and ethanol cars (even diesel given better fuel economy) may push down oils share. As of now this looks like having limited impact as long as Ford sells 900K F-150's a year
. Nevertheless, a technological break through could send oil down.
Flanker,
The mid/long terms depends on political developments. For example, suppose Chavez is deposed and the previous management of PDVSA gets back in the driver seat. Give them a solid decade and Venezuelan production could easily be 6 or 7 million barrels, maybe more. Russian, if Putin stays he will keep a lid on production but if someone else were to come to power production there could be increased. And Iraq is a huge wild card. If the U.S. could defeat the insurgency they could get that place pumping out 7 or 8 million barrels. Those things all happen and OPEC is doomed and its right back to oil in the teens or even single digits.
Tor, As per our previous conversation check out "For a Few Dollars Less" on the Wall Street Journal Op-Ed page today. Hopefully you're around a library where you can get your hands on it.
I think oil prices have more a problem on the supply side than demand side. Gas is $2.50 in the U.S. and its viewed as cheap by most people. I still haven't noticed anyone driving slower yet
But you are right that lots of other producers could jump in. And actually from that point of view it doesn't matter if oil is $30 or $70. The tar sands become profitable once you go over $20 so that is going to ramp up no matter where the band is set.
BTW, on Saudi Arabia, I think they are changing a little. They seem to be getting a little more hawkish. Given a growing and restless population they can't as easily afford to appease the U.S. and need to flat out maximize revenue.
Liked both your posts ow.
In respect to the first post I agree that there is substantial confusion out there. Given how the IEA has been changing standards this does make some sense.
Your main point is well taken. The 2.6 vs. 3 comparison glosses over details and measurement issues. In fact, you are right that if we look at the total numbers Venezuela is only slightly less than in 01. It does look like the 2.5-2.6 numbers exclude Orinoco heavy crude.
This being said, there is some evidence for the other side. First, as you correctly point out, production of light crude is down. Since this oil is more profitable this is a concern. Also if you take the claim that crude oil production (defing crude oil as excluding heavy crude as the IEA previously did) there is a drop from 2.6 to 2.1. This is exactly the .5 that the other side claims is missig. Of course they conveniently forget the heavy crude, but their naked claim that "crude oil" production is down .4-.5 seems correct.
You claim this is a voluntary cut. I do not claim that you are wrong, but I would be interested in reading sources to confirm this. If it is not voluntary to would confirm the other sides concerns. In fact, most OPEC countries (if they can) produce over quota, typically real output hovers 10% above the agreed quotas. SO Venezuela could probably get away with produces .2-.3 more.
I mostly disagree with your view on the heavy crude projects. Venezuela would not sign a contract with such low taxesroyalities today given high prices. Despite this I stress that to lure foreign companies in 95-00 to make these investment, they needed to make it attractive.
These investments are favorable in many ways. First and most important, they give Venezuela to technology and know-how to bring its Orinoco reserves to market; this is something the country needed in the 90s. Second, having spare capacity is not necessarily bad. If high becomes even tighter quotas may even increase. What would Venezuela do then? Invest. Sure, but their is a huge lag before new investment brings more capacity to market.
Also the heavy crude projects can be made to reduce production too although some of their upgrader units to not like being shut on and off. They made been made to restrict output previously.
As for the oil price who really knows? What is for sure is that there are scenarios that bring the price down substantially. For example weaker global growth, less speculative flows and a lower "war premium". Given this uncertainty it is better for Venezuela to save some money for bad times. Sure Chavez is paying for international debt (the same can't be said for domestic debt), but he still has budget deficits and no FIEM.
Social spending is needed, but it is important to avoid a hangover when (not if) oil prices fall in the medium to long term.
Also PDVSA will invest in significant capacity (I looked at there reports online). how is this is reconcilable with OPEC quotas i
....how is this is reconcilable with OPEC quotas is unclear. In fact Guisti claimed to want 5 million barrel by 07, PDVSA now wants 5 million by (i forget when) 2012?
"I still haven't noticed anyone driving slower yet"
No but most of the difference can be made by (1) driving less or (2) switching to more economical cars. On (2) I have noticed the appearance of small cars such as Chevrolet Aveo. Recently Nissan, Toyota, Honda, Kia and Hyundai all introduced small cars. Dodge and Ford have them coming. Prius sales are high (but this is more fashion thing more than anything else). SUV sales are down. Also some parts of the country have higher gas taxes i.e. I paid 2.86 today. But in general the US is rich and the high gas price makes little difference for most.
However, their is plenty of political will to push for fuel efficiency (also due to pollution). Witness even Bush claimed the US was addicted to oil in the State of the Union. Nothing will happen in the short term, but a major breakthrough would be a significant negative factor. The higher oil goes the harder will be the push to achieve this breakthrough. I agree the problem is mostly on the supply side, but it is important not to forget the demand side.
"Given a growing and restless population they can't as easily afford to appease the U.S. and need to flat out maximize revenue."
Maximizing revenue is mostly what they seem to be doing. Whether cuts succeed in increasing revenues depends on the interplay between the impact on the effectiveness of the cartel and the elasticities of demand. Saudi does remember the 80s and 90s when lots of capacity came on stream and depressed prices. This capacity only came on stream because of high prices. The Saudi's could in theory drive almost everyone out of the market since their production costs are so low.
Restless? Good point. Yes, contrary to the popular belief that Saudi is a rich country it actually has growing social problems. Also GDP is low given its wealth ($8000-9000) or so significantly less than South Korea. Sowing the oil wealth has been hard there too.....in fact only one country seems to have done it right.
ow Venezuela wants to produce 6 million in the mid term, I doubt it is hot air. Russia is already producing at capacity and Iraq can at best hope to get back but 6 or 8 is too much.
Few countries can ramp up production significantly.
BTW visited Barquisimeto today when passing by, nice place by relative standards saw the Solar monument while passing by. Passed Caracas, stayed in Barcelona and Maturin. The highways (my def is just two lanes) is considerable in the west, but badly deficient in the east. I await the completion of the Oriental highway with much anticipation (40 years) They opened a small passage between after Guatire and Caucagua for easter (One way returning to Caracas and leaving depenging on the day) but I missed it. Supposedly the entire thing should be halfway finished by November, Construction also started between Unare and Piritu in Anzoategui.
"solid decade and Venezuelan production could easily be 6 or 7 million barrels, maybe more."
This may not be bad. If this caused the price to fall by 40% it would in fact be better. Who knows really? Again it depends on OPEC and world dynamics. Again, entertain for a second the possibility of Venezuela free-riding on OPEC (Iran and Saudi would probably still cling to it and they are the gorillas). Look at Norway for example. They pump as much as they can always......not saying it is wise, but it is worth a thought.
"Supposedly the entire thing should be halfway finished by November, Construction also started between Unare and Piritu in Anzoategui."
The Unare stretch will be done in March next year. The rest... who know? But they do have plans for more in Anzoategui at least. On the bright side the Caucagua part was the most technical and costly part. In addition can will build a three laner to Higuerote.......I went once and it took from 8 hours to get back (no exaggeration and no accidents, strikes or anything to pin it on). Needless to say I did not go again.
But like I said in a previous post the government prefers to build railroads in Guarico and Apure instead on crucial highways. Unfortunate.
Yeah I saw the plans on alo presidente (to date the only one I have ever seen) the highway is supposed to be finished by Nov to Higuerote, it takes the route of the original plan (I cannot stress this enough 40 years) and makes a 90 degree turn before el Guapo towards Higuerote.
According to Tarak William Saab the whole thing should be finished within 2 years, but I will see it to believe it.
As for priorities, it should be able to do both IMHO, a railway is more strategic, this is more finishing what was promised by previous regimes.
"makes a 90 degree turn before el Guapo towards Higuerote."
So you will have to go to Higuerote to reach PLC by highway? Or will they build another from Caucagua to El Guapo?
"but I will see it to believe it."
Definitely, they are still missing the whole stretch from Boca to Caucagua....and we are not talking a couple kilometers here.
"a railway is more strategic,"
Maybe. But in any event they should do what is most needed first. Caracas has not seen any major road project in decades for example. Rail can be ok, but I would prefer to see a train service to Guatire/guarenas than to Apure.
"this is more finishing what was promised by previous regimes."
I do agree that if they finish what they claim they will finish by November this will be pretty good compared to the governments in the 80s and 90s. Two metro lines, railroads, bridges, highways....not bad even impressive. Maybe comparable to the work that was done in the 70s. What else is comparable? Well, besides the oil prices.....
The article is a classic piece of trying to talk the market down. There is absolutely no chance of oil collapsing back to $20, as this would require a vast supply cushion that no longer exists or a major global economic depression. It's worth noting that the current headline prices are for light, sweet crude - many people believe that this grade is becoming scarcer and that the price spike has come in the wake of the loss of Nigerian production of this grade, starting in February.
Anybody who follows the global statistics knows that the oil producers have been unable to get production above 85 million barrels per day, that there ongoing production problems due to political violence ( and the direct targetting of oil infrastructure ) in Nigeria and Iraq, and that if there is a war with Iran then up to 14 million bpd of oil exports from the Gulf region are liable to be lost. Add in the prospect of another bad hurricane season ( 330kbpd of GoM production are still off-line from last year ) and mounting evidence of depletion from Kuwait, SA, Mexico, the North Sea and elsewhere, and the reality is that there are significant and legitimate worries over the supply stream in the coming months.
Whilst US crude stocks are building, it's worth noting that US gasoline stocks are declining - and this is before the driving season gets underway in earnest.
dan:
You make a number of good points. Indeed the article did mention the gasoline stocks being low. And all your other points are equally accurate.
But two things:
1) it doesn't take much of a market overhang to crash prices. Oil prices swing on a couple of million barrels. So it really doesn't take much to make them drop. And the article is making the point that there is already a surplus of that magnitude that is just being inventoried. The build up of inventories (and I think when you net out the gasoline and oil inventories there is a significant increase overall) can't continue indefinitely and may well lead to a crash
2) The other thing is there is clearly a lot of speculative money going into oil (and commodities in general). Oil is being bought with the expectation that it will go up just like stocks were a while back. How long will that continue? And how much are those types of purchases driving the price up.
We know two things that should give us caution. First oil prices have always been highly voletile with booms and busts. Is there reason to believe this is the end of that and they will now be high permenently? Second, there have been predictions of the world running out of oil for the past century. Are the current predictions of Peak Oil likely to be more accurate? I wouldn't bet on either of those things so OPEC needs to be prudent and stay on guard which is exactly what Venezuela is pushing it to do.
"So you will have to go to Higuerote to reach PLC by highway? Or will they build another from Caucagua to El Guapo? "
Nope, the highway will be inagurated as a highway to Higuerote but that is somewhat a new development. It will run from Caracas to before el Guapo along the original plan and then fork to Higuerote due north. That is what is stated to be finished in Nov 06 and again it will be inagurated as the Highway to Higuerote for the political cache (nobody wants a half finished inaguration that is for Caldera's regime 
), but the trip east will benefit greatly, not only because the roads surrounding Caucagua are the worst stretch but also because between El Guapo and Boca de Uchire is actually halfway decent (for a road). Not to mention in Carnaval and Easter the pack that goes to Higuerote wont really bother the ones going to Anzoategui.
The whole thing Caracas to Barcelona/Puerto La Cruz (maybe even up to Cumana) should be finished in 2 years according to Saab.
There is also plans to start a Highway all along the llanos way south of the cordillera much to your chagrin From Portuguesa or Cojedes up to Monagas or even Delta Amacuro :o (typical brainstorm from Chavez)
Of course the government's strategy is to push the population southward to lessen the population density along the coast.
Here is a good map
http://www.a-venezuela.com/mapas...s/
mirandav.html
Again continues to Highway from Caracas to around El Clavo and then it forks north to Higuerote.
Flanker,
I think you are right. Although I would say Caucagua-El Guapo es semi decent whereas El Guapo-Boca is somewhat worse, but still mostly adequate. They are at least fixing the worst sections around Caucagua and Unare-Piritu. CCS-PLC is probably the road I know the best in Venezuela. Thanks for the map!
Chavez brainstorming seems to motivate some projects like the ones you mention. Cost-benefit analysis seems to be less important.
Saab is optimistic about having the whole thing ready in two years....lets hope he is right but I have my doubts especially about the Cumana highway.
Hmmmm...funny, but I just KNEW that cutting back on passenger rail and other public-transit investment in the US was going to jump up and bite them in the ass...
Different definitions of decent I was talking about safety rather than physical road conditions (although the worst part was recently pavimented), Between El Guapo and Boca there are fewer blind curves than near Caucagua, mostly preceding it.
I have travelled that road(s) many times too.
I think Dan's comment is worthy of reiterating: if oil fell through $30 a barrel, it would signal a major global downturn, probably a recession or depression on the scale of 1973-1974, and possibly as bad as the 1930s.
It would be catastrophic at many levels, for example, there would probably be dramatic asset deflation globally, while real estate getting hammered, from Sacramento to Caracas to Indonesia.
I'm no authority here, but there are two things that I consider noteworthy, beyond the obvious fear factor of the US/Iran dispute.
First, while it does not get front page coverage, the Nigeria situation seems to only be getting worse. And, if West Africa is perceived as a future source of oil (as it clear is by the US and Britain, who have been emphasizing closer military ties with countries like Equatorial Guinea), this is alarming for reasons beyond the effect on existing supply.
Second, the Saudis seem to be acknowleding that their ability to produce in the future, at least in the way that it is done now, has peaked, and will decline in the future. Now, of course, they claim to have new technologies that will continue to stabilize production at current levels . . but, that's not the kind of thing that inspires confidence if you are an oil consumer or oil trader.
Just sounds way to speculative, untried.
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