First, consumption and production:
The world we inhabit today is a much different world than the one that existed 10-12 years ago. China has now become the world's second largest economy after the U.S. According to a recent IEA report we are facing a problematic global economic backdrop leading to a two-speed economic outlook-robust demand in non-OECD countries and falling demand in OECD nations. The result is that oil demand is expected to contract by 400,000 bd in the western world and increase by 1.2 mbd in the non-western world. The result is that oil demand continues to grow. After falling for two consecutive years, global oil consumption grew by 2.7 mbd in 2010. OECD consumption grew by 0.9% or 480,000 bd, a first since 2005. Non-OECD demand grew by a record 2.2 mbd, or 5.5%. Most of that demand growth occurred in China and the Middle East.In round numbers that's over 1 million bopd currently not being supplied; but you know, there's always unrest somewhere, problems somewhere. I assume on any given day over the past twenty years one can find excuses for "lost" oil -- remember the burning Kuwaiti oil fields under George I; and I don't think Iraq was exporting a lot of oil under George II's era of "shock and awe."
We have now surpassed the consumption levels reached in 2008. The IEA estimates that oil demand is forecasted to climb to 89.9 mbd in 2012, a gain of 0.8 mbd, an increase of 0.9% over last year. But where is all that increased oil going to come from? [Comment: well, for starters, the Bakken alone will be producing close to 0.6 million bopd by the end of the year]. In addition to worries over the loss of Iranian exports of 2.6 mbd, Libyan oil production is still down by 600,000 bpd from its peak before the civil war. Unrest in Yemen has knocked off roughly 250,000 bpd. South Sudan has stopped pumping 260,000 bpd day due to disputes over payments for use of its pipeline and export facilities. Civil unrest in Syria has led to a reduction of output by 200,000 bpd and Nigerian output has fallen by 20,000 bpd.
But I digress.
What about the 2.6 million bopd that comes off the market if the Obama-Iran embargo goes into effect? Something tells me, this will all be worked out -- at worse, with "smoke and mirrors" behind the scenes; there's no way the Obama administration can manage a global loss of 2.6 million bopd effective July 1. It ain't gonna happen. If that much oil is taken out of production, it will be interesting to hear Bill O'Reilly, et al, talk about "speculators" again. It won't be speculation; it will be reality.
The linked article confirms my suspicions about Saudi Arabia's ability to respond with spare capacity, and so the same with the US Strategic Petroleum Reserve. Saudi is hard-pressed to make up that difference. Especially if pipelines are blown up or if oil-loading terminals are closed due to blowing sand.
With regard to refining:
The refining business has become unprofitable. Thirty-one (31) uneconomic refineries have been shut down in recent years, with two dozen more on the chopping block. Refiners earn an average profit of $11 for every barrel they process. That equates to $0.26 a gallon, about the average profit over the past decade. By comparison state and federal taxes average $0.39 per gallon. Now who is being greedy, the oil companies that do the work of refining oil or the governments that collect a tax?Bottom line:
One can always find examples of disruptions in oil supply, so I don't get too excited about the "lost" one million bbls noted above from Libya, South Sudan, Yemen. The author didn't mention a similar amount in new oil coming from the likes of Utica, Bakken, Permian, and Eagle Ford. So, that's a wash.
On July 2, 2012, there may be folks arguing that the embargo has taken effect and/or is effective, and there may be folks arguing that the embargo hasn't happened and/or isn't effective, but I honestly don't think come July 1, 2012, I'm going to wake up and read that 2.6 million barrels of Iranian oil is suddenly off the market.
