A Primer on Supply and Demand of Oil

sleepyeyeegyptianOil and Offshore

Nov 8, 2013 (3 years and 5 months ago)

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A
Primer on
Supply and Demand of Oil

by Marjolein van der Veen




Which countries are the major consumers of the world’s oil?


The U.S. is the largest oil consuming country, consuming about 25% of the world’s oil (while the
next largest consumer, China,
consumed about 8.5% of the world’s oil). In 2009, the U.S.
consumed about 20.6 million barrels per day (mbd). Next comes China, at about 7.3 mbd, Japan
at 5.2 mbd, Russia at 2.9 and Germany at 2.7 mbd (2007 data). In the future, the largest growth
of con
sumption is expected to come from China and India, which will account for 45% of the
increase in primary energy demand by 2030.



Which countries are the major suppliers of the world’s oil?


The largest oil producing countries in 2007 were: Saudi Arabia,
Russia, U.S., Iran, China,
Mexico, Canada, the U.A.E., Venezuela, Norway, Kuwait, Nigeria, the U.K., and Iraq. Some of
these oil producing countries are members of the Organization of Petroleum Exporting Countries
(OPEC). The 11 OPEC members are: Saudi
Arabia, Iran, Iraq, the U.A.E., Kuwait, Qatar,
Algeria, Libya, Nigeria, Indonesia, and Venezuela. OPEC will control 51% of total global oil
output by 2030.


For maps showing producer and consumer countries:

http://www.nytimes.com/interactive/2007/11/06/business/20071107_WINNERSLOSERS_GRAPH
IC.html


The biggest oil companies themselves also own sizable holdings of reserves. According to
Juhasz, were s
ix of the big oil companies one country, “Big Oil would rank among the top ten
most oil
-
rich nations in the world.” (Juhasz, 2008, p. 131).



How much of its oil does the U.S. need to import, and where does it get it from?



While the U.S. consumes abo
ut 20.6 mbd, it produces only about 5.1 mbd (in 2009), and so it has
to import about 60% of its oil. In 2007, U.S. oil imports came from Canada (about 20%), Mexico
(12.5%), Saudi Arabia* (12.5%), Venezuela (11.7%), Nigeria (9.2%), and then Algeria, Iraq,
Angola, Russia, and the U.K. (*In 2008, Saudi Arabia was the second largest source of imported
oil to the U.S., overtaking Mexico:
htt
p://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/i
mport.html
)


For the latest statistics on oil production, consumption, reserves, and prices:
http://www.
eia.doe.gov/basics/quickoil.html

http://www.eia.doe.gov/emeu/aer/ep/ep_frame.html

www.eia.doe.gov/emeu/CHRONOLOGIE
S/chron_aug2005.xls

http://www.nytimes.com/2008/03/03/business/worldbusiness/03cnd
-
oil.html



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What determines the price of crude oil?


Before the 1970s, the seven ma
jor oil companies (the “Seven Sisters” comprised of Exxon, Mobil,
Chevron, Gulf, Texaco, BP, and Shell) had in effect a cartel (and thus oligopolistic control) over
the production and price of crude oil. By establishing production quotas, supporting gover
nments
friendly to the Big Oil companies, and playing oil producing countries off each other, they
maintained considerable control over the price of crude oil. After the formation of OPEC, oil
exporting countries obtained greater control over the price of

oil by the 1970s, by standing
together in their negotiations with the big oil companies, in many cases nationalizing their oil, and
setting their own production targets. However, OPEC’s price
-
setting ability was destroyed by
three factors: the decline i
n demand for oil after the 1970s oil price shocks; the increased
production by non
-
OPEC countries; and the 1983 introduction of the futures market for oil at the
New York Mercantile Exchange (Juhasz, 2008, pg. 132). Today, the oil futures market has
large
ly replaced OPEC as the principal determinant of the price of crude oil. Much of this trading
on the futures market was deregulated by Congress in 2000 (with the “Enron Loophole” in the
Commodity Futures Modernization Act).


Other factors that affect su
pply and demand factors can influence the price of crude oil on a daily
basis, such as: wars or conflicts, hurricanes and other weather events, refinery shutdowns and
other production mishaps, etc., and changes in the value of the U.S. dollar.



What ca
used the run
-
up in oil prices, which peaked in the summer of 2008?


The price of crude oil climbed from $55 a barrel in 2007, peaking at almost $150 a barrel in July
2008. One of the causes of the run
-
up in oil prices is often said to be due to the force
s of supply
and demand, whereby the supply could not keep up with the rise in demand. But speculation and
changes in the value of the U.S. dollar also played significant roles.


While some dismiss that speculation had anything to do with the price spike,
others such as the
economist Thomas Palley, argue otherwise. According to Palley, “
the actual behavior of oil prices
is consistent with speculation. In June, oil prices leapt by $11 in one day, and in July they fell
back by $15 in three days. Such volatili
ty does not fit a fundamentals
-
driven market.” (see

http://www.thomaspalley.com/?p=118#more
-
118

).


According to Juhasz, author of the book
The Tyranny of Oil

(2008)
, “
The futures market has
rep
laced OPEC as the principal determinant of the price of crude oil. It is largely unregulated and
prone to excessive speculation and manipulation.” (
http://www.truthout.org/102308M

).


And according to a 60

Minutes expose, “Last year, 27 barrels of crude were being traded every
day on the New York Mercantile Exchange for every one barrel of oil that was actually being
consumed in the United States.” (see “Did Speculation Fuel Oil Price Swings?”
http://www.truthout.org/011209K

). Much of the speculation is done by Wall Street investment
banks, like Morgan Stanley and Goldman Sachs. “Over time, the big Wall Street banks were
allowed to buy and sell as many oil c
ontracts as they wanted for their clients, circumventing
regulations intended to limit speculation. And in 2000, Congress effectively deregulated the
futures market, granting exemptions for complicated derivative investments called oil swaps, as
well as el
ectronic trading on private exchanges.” (
http://www.truthout.org/011209K

, or see:
60
Minutes, “The Price of Oil,” (Jan. 11, 2009), 13 Minutes,
http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770.shtml
)




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Why did oil prices suddenly fallen over the fall of 2008?


According to Michael Klare, oil prices fell over the fall of 2008 mostly due to the fall in global

demand, with the global recession: “
The contraction in international demand has indeed been
stunning. After rising for much of last summer, demand plunged in the early fall by several
hundred thousand barrels per day, producing a net decline for 2008 of 5
0,000 barrels per day.
This year, the Department of Energy
projects

global demand to fall by a far more impressive
450,000 barrels per day
--

"the first time in three decades that world cons
umption would decline
in two consecutive years."” (see
http://www.commondreams.org/view/2009/01/08
-
1
)


Could the fall in oil prices also be due to changes in supply? In June (2008), the Saudi
s indicated
they would increase production, but they were not expecting the significant fall in demand over
the fall. In recent months (starting in September) 2008, OPEC has been slashing output, in an
attempt to halt the fall in the price of oil, and onl
y in January 2009 did the price of oil start rising
again. (See
http://www.nytimes.com/2009/01/26/business/worldbusiness/26opec.html

)


However, according to the 60 Minut
es program, “
The oil bubble began to deflate early last fall
when Congress threatened new regulations and federal agencies announced they were
beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the
near collapse of

AIG, who were both heavily invested in the oil markets. With hedge funds and
investment houses facing margin calls, the speculators headed for the exits.”
(
http://www.truthout.org/011209K

) (Note: banks l
ike JP Morgan Chase and Goldman Sachs are
starting to look more and more like oil companies as they have purchased pipelines, storage
fields, and their own oil fields. See Juhasz 2008, pg. 162.)


There is also the role of the value of the U.S. dollar. Oil

futures are priced in U.S. dollars. As the
dollar depreciates in value, the price of oil rises, and vice versa. The value of the U.S. dollar had
been falling through the spring and summer of 2008, and then started rising again in July 2008.
See:
http://markets.on.nytimes.com/research/markets/currencies/currencies.asp

(Note however, that from April 2007 to April 2008, the value of the dollar fell by about 10%,
wherea
s oil prices rose by about 85%, suggesting factors other than the value of the dollar are
also at play. See Juhasz, 2008, pg. 129.)



What determines the price of gasoline?


The price of gasoline is principally determined by the price of crude oil, but ot
her determinants
include the costs of refining and marketing of gasoline, as well as taxes. For every dollar spent
on gasoline in 2007, about 52 cents went for the crude oil, 21 cents for the refining, 11 cents for
the marketing, and 16 cents for taxes (J
uhasz 2008, pg. 174).


Mergers and consolidation among refineries and gas stations have meant that these are largely
controlled by the six largest oil companies: ExxonMobil, Chevron, ConocoPhillips, BP, Shell, and
Valero (Juhasz 2008, pg. 171). By restri
cting the supply and availability of gasoline, they are
more able to control its price. According to Juhasz, there has not been a single new refinery built
in the U.S. since 1976 (2008, pg. 186). The refining and marketing of gasoline have become
major p
rofit areas for the big oil companies.



In the future, from where will the U.S. most likely get its oil?


Oil is a non
-
renewable fossil fuel, and the supplies of oil in many countries are dwindling. Many
countries are reaching their peak, and are no long
er able to produce as much as they consume.
According to the latest 2009 report by the Energy Information Administration, the era of cheap
and plentiful oil is drawing to a close (see: Klare’s
http://www.tr
uthout.org/061109R
).



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One region that has traditionally had a lot of the world’s oil reserves is the Middle East/Persian
Gulf. The Persian Gulf countries hold 2/3 of global oil reserves, and t
he 13 members of the
OPEC account for three
-
quarters of the w
orld’s proven oil reserves.
Indeed, the countries with
the largest amounts of known oil reserves are: Saudi Arabia, Iraq, and Iran. The oil in this region
is of good quality, and easily extractable at low cost. Elsewhere, for example where reserves are
underwater on a deep
-
sea shelf, oil is very costly to extract.


However, the information on the levels of oil reserves tends to be unreliable. For instance, OPEC
takes into account a country’s reserves when fixing production quotas, so the more oil a coun
try
has, the more they are allowed to sell, producing an incentive to inflate their stated reserves.
Also, oil reserves can sometimes be used as collateral for loans. And in some countries, the
figures for oil reserves are state secrets. Hence, the unre
liability of the reserve data.

Most of the oil (95%) is conventional oil. However, the rest is unconventional oil, consisting of tar
sands, shale oil, and oil not recoverable with today’s technology. If this unconventional oil is
included, countries like

Canada and Russia are considered to have significant sources of
reserves.



What are the hidden costs of oil?


One of the hidden costs of oil is the amount spent by the U.S. military to defend access to oil.
According to a report by the National Priori
ties Project, the U.S. is spending between $97
-

$215
billion per year on military action to defend access to oil and natural gas reserves around the
world. That is money that could have been spent developing renewable energy technology and
other methods
to wean ourselves off oil (see:
http://www.nationalpriorities.org//Energy_Security/Energy_Priorities
)



Should the U.S. be trying to increase supply by developing new sou
rces of oil (such as tar
sands in Canada, shale oil in the Midwestern states, or off
-
shore drilling in the U.S.)? Or
should the U.S. pursue conservation and reduce its demand?


Tar Sands and Shale oil:


While the estimated amounts of tar sands and shale o
il are significant, they are very expensive to
turn into oil. Digging up and processing tar sands costs between $9 and $13, while Saudi Arabia
only spends about $2 for a barrel of oil.
(see:
http://
www.energybulletin.net/node/4385

). They
are also far worse for the environment. Tar sands and shale oil is more greenhouse gas
producing, compared to conventional oil production (almost three times more, in the case of tar
sands). Getting to the tar sa
nds often entails chopping down the boreal forest, and the energy
used to extract and process the tar sands, all contribute to climate change. Both the production
and refining of tar sands and shale oil also contributes to water, air and land pollution.



Off
-
shore Drilling:


It would take about a decade until the oil from off
-
shore drilling is out of the ground, and it would
be of such little amount that it won’t significantly affect prices. According to the EIA, about 86
billion barrels may lie offsho
re, and of that, 18 billion are subject to the moratorium against
offshore drilling (i.e. about 2.5 years worth of oil)… Thus, offshore drilling would increase
production by only 0.2%, and only more than a decade down the road. (See:
http://www.boston.com/news/nation/articles/2008/06/20/new_offshore_drilling_not_a_quick_fix_a
nalysts_say/
,
http://www.truthout.org/012509Y
)

These projects become feasible and profitable when the oil prices are high, but less so when the
oil prices fall (especially when they fall below the cost of production). And here too, the cost to

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the environment (as we
ll as the fishing and tourism industries) are huge. Drilling in water depths
greater than 50 feet releases methane, a potent greenhouse gas.



Conservation and demand reduction:


Europe has been relatively successful with conservation. Europe’s gas con
sumption remains at
1970 levels:
http://www.eia.doe.gov/emeu/mer/pdf/pages/sec11_7.pdf

In part, gasoline in
Europe is taxed heavily, and the high price of gasoline deters consumption.

It has also provided
tax revenues for investment in public transportation and other infrastructure to reduce the
demand for gasoline. For data comparing gas prices around the world, see:
http://money.cnn.com/pf/features/lists/global_gasprices/



Sources
--

and for more information:


Websites:


www.iea.org

www.priceofoil.org

www.tyrannyofoil.com


http://www.nationalpriorities.org//Energy_Security/Energy_Priorities

www.energycrisis.or
g

www.globaloilwatch.com

www.peakoil.com

www.fueleconomy.gov


http://topics.nytimes.com/top/news/business/energy
-
environment/oil
-
petroleum
-
and
-
gasoline/index.html


http://www.afdc.energy.gov/afdc/f
uels/index.html


For the 1
-
year trend in oil prices:

http://markets.on.nytimes.com/research/markets/commodities/commodities.asp

For the 1
-
year trend in the value o
f the U.S. dollar:

http://markets.on.nytimes.com/research/markets/currencies/currencies.asp



Books:


Antonia Juhasz,
The Tyranny of Oil

(2008)

Michael Klare,
Resourc
e Wars

(2001), and
Blood and Oil

(2004), and
Rising Powers, Shrinking
Planet: The New Geopolitics of Energy
(2008)

Richard Heinberg,
The Party’s Over

(2003), and
Powerdown

(2004).

James Howard Kunstler,
The Long Emergency

(2005).

Jeremy Leggett,
Half Gone

(2006), and
The Empty Tank

(2005)


Articles:


Roger Lowenstein, “What’s Really Wrong With the Price of Oil,”
New York Times
, Oct. 17, 2008,
http://www.nytimes.com/2008/10/19/magazine/1
9oil
-
t.html

Michael Klare, “The Problem of Cheap Oil: Be Careful What You Wish For,” (Jan. 8, 2009),
http://www.commondreams.org/view/2009/01/08
-
1


Antonia Juhasz, “Big Oil’s Last Stand,” (Oct
. 22, 2008)
http://www.truthout.org/102308M

60 Minutes, “Did Speculation Fuel Oil Price Swings?,” (Jan. 11, 2009),
http://www.truthout.org/011209K


Palley, “B
eating the Oil Barrons,”
http://www.thomaspalley.com/?p=110#more
-
110

Palley, “Speculators at the Pump,”
http://www.thomaspalley.com/?p=
118#more
-
118

“The oil crunch is coming,”
Guardian Weekly
, (Nov. 21, 2008, pg. 18).


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Films:


Blood and Oil

A Crude Awakening: The oil crash

The End of Suburbia

Who Stole the Electric Car?

60 Minutes, “The Price of Oil,” (Jan. 11, 2009), 13 Minutes,
http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770.shtml