High Oil prices, Who to Blame?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sky High Oil Prices
In 1976, the price of oil (WTI) was at $12.23, according to BP's 2012 June Energy Review. Now, we see WTI at around $94. Why the jump? Some may say inflation, but according to the BLS inflation calculator, if only inflation was causing oil prices to rise, then WTI would be $49.32 a barrel, not $94. So why are oil prices so high?
Some say it's OPEC's (Organization of Petroleum Exporting Countries) fault, as they seek to drive oil prices higher to strengthen their own economies. Well, that also doesn't hold up. In 2001, total production per day from OPECs members was 30,555 million. In 2011, a decade later, that had risen to 35,830,000 million. 5.3 million more barrels of oil per day have been injected into the global supply. So, claims that OPEC is to blame don't really hold up. Plus Nigeria, a major OPEC player, wants to increase its oil production from 2.45 million barrels now to 4 million. This seems doable, as violence around the Niger Delta has calmed down since the numerous conflicts in the 1990's and the 2000's. Plus the United States has pledged to help Nigeria deal with the armed terrorist groups such as MEND. Venezuela is one of the laggards in OPEC, as its oil production has fallen from 3.142 million in 2001 to 2.72 million in 2011.
Europe to blame?
The European Union has seen a sharp drop off in oil production over the past decade. This has directly resulted in Europe having to pay much more for gasoline than in the United States. In Italy, for a gallon of gasoline it cost $9.64 (back when Brent was trading at $120 a barrel), but there is a 54% tax on gasoline. Not including the tax, gas prices were $4.63 a gallon, which is a hefty premium compared to the US. We start getting angry if our gas goes over $3.50 a gallon and are furious when it hits $4, yet this is what Europe deals with on the daily. In 2001, the European Union's total production was 3.281 million barrels of oil per day. Now, it is 1.692 million bpd. That is sad, especially when you factor in the fact that France alone could have as much as 100 billion barrels of oil hidden away in southern France, which could be accessed if the fracking ban is lifted (according to France's Ministry of Industry). If that oil field was to come online, Europe could see its total oil production rise back up and even exceed 2001 levels. This is assuming France cranks out at least 2 million bpd, which would be a piece of cake if they really do have 100 billion barrels of oil in southern France. Libya, which has about 44 billion barrels of oil reserves, had a production rate of 1.6 million bpd before the revolution and civil war, so for France, 100/44 x 1.6 million = 3.6 million bpd in theory.
Now, I'm not saying that France's oil production is about to skyrocket or the fracking ban will be lifted, but this is a possibility for the future (just speculation). Total S.A. (NYSE: TOT) would stand to gain a lot if the fracking ban was lifted, as they agree with France's Ministry of Industry and have stated they would love to start drilling in Southern France, but when the fracking ban was put in place several of their drilling permits were taken from them. On September 14 and 15, a debate will begin over whether or not fracking should be allowed in France to reduce their dependence on oil imports so they can bring down oil prices and create much needed jobs (France's unemployment rate stands at 10.1%) to stimulate their economy. Personally, I think they should encourage fracking as it will give their economy a boost, lower oil prices, create jobs, increase tax revenue, and help them reduce their trade deficit. Britain has also seen its oil production drop off, from 2.476 million bpd in 2001 down to 1.1 million bpd in 2011. One thing that will be worrisome to Europe is that Norway's oil production levels have fallen from 3.418 million bpd in 2001 down to 2.039 million in 2011. This will force Europe to turn to less stable regions for their oil needs, such as Russia, the Middle East, and Africa.
Hypocrisy or Ignorance?
While there are those who say that OPEC, the Middle East, Russia, and other foreign oil companies are manipulating oil prices higher, there is a flaw to their logic. Most of those who are complaining live in countries that are members of the OECD (Organization for Economic Cooperation and Development). In other words, they live in developed nations like the US or Germany. Now, where the flaw in their logic comes into play is over production. Since 2001, oil production levels in OECD nations has fallen from 21.343 million bpd to 18.543 million bpd in 2011, while non-OECD nations has seen their oil production rise from 53.424 million bpd to 65.032 million bpd over the same time period. So when politicians and leaders from developed nations blame non-developed or non-OECD nations for higher oil prices, or they just simply blame OPEC, I hope you laugh at their stupidity for me.
Who did you just say?
While looking through BP's energy review, I saw two nations you never hear of, Azerbaijan and Turkmenistan, both increasing their oil production, with Azerbaijan's production up over 300% over the past decade (301,000 bpd to 931,000 bpd), and Turkmenistan's oil production is up 33.3% over the past decade (162,000 bpd to 216,000 bpd). Many nations who most have never heard of can offer great investment returns. Several oil majors currently operate in Azerbaijan, such as BP plc (NYSE: BP), which owns 35.78% of the Azeri-Chirag-Guneshli project and has currently produced 2 billion cubic meters of natural gas from the Shah Deniz field this year. The Azeri-Chang-Guneshli project is located in the Caspian Sea off the coast of Azerbaijan, and has several oil majors invested in the project alongside BP, such as Chevron Corp (NYSE: CVX) with a 11.27% stake in the project, and Exxon Mobile Corp (NYSE: XOM), with just a 8.0006% stake. While this is just one of many projects these oil majors participate in, it is still an interesting one to watch, especially when Azerbaijan's oil production levels are up three-fold over the past decade.
Consumption and the US
On the other side of things, there are those who blame the US and its enormous demand for crude to be the source of higher oil prices. In 2001, the US consumed 19.649 million bpd, and in 2011, it consumed 18.835 million bpd. Analysts do see that increasing to 20 million bpd in the years to come once we do experience a recovery, but that still doesn't show us where these higher oil prices are coming from. For more context, prices for WTI in 2001 were at $25.93. Dirt cheap compared to now. Was it due to a drop off in US production? Well, no. Once fracking was perfected in 2006, production levels took off. In 2001, oil production in the US was at 7.669 million bpd, but dropped to 6.841 million bpd in 2006, only to rise back above the 2001 level in 2011 and hit 7.841 million bpd. So the United States doesn't seem responsible for the rise in oil prices.
I think we have found one of the guilty culprits. China. In 2001 China consumed 4.859 million bpd, but by 2011, that had doubled to 9.758 million bpd. And, during that same time, China's oil production has risen from 3.31 million bpd to 4.09 million bpd from 2001 to 2011. While this is a rise in production, it isn't nearly enough to meet the extra 5 million bpd of demand, which means China must import more oil. If China has to import more oil, then other nations heavily dependent on oil imports (like Europe and the US) have to compete on price to get major oil producers to sell them oil, which causes oil prices to rise. Simple supply and demand. India has also seen a rise in consumption levels over the years, from 2.288 million bpd in 2001 to 3.473 million bpd in 2011. For India, as they continue to follow a similar economic trajectory as China, will continue to see this number rise for decades to come.
How to benefit
As of right now, the world is consuming about 5 million more barrels of oil per day than we are producing. While several nations, from Ghana to Brazil, are experiencing a boom in production, a boom in consumption from emerging markets like China and India will likely outpace production growth for a while. This will cause the price of both Brent Crude and WTI to rise, so ETFs like iPath S&P GSCI Crude Oil Total Return (NYSEMKT: OIL) or United States Brent Oil Fund (NYSEMKT:BNO) can be a way to play higher energy prices. A better way to go is to buy the E&P players themselves. Big Oil companies like BP, Chevron, Exxon Mobile, Total, and Royal Dutch Shell plc (NYSE: RDS-A). Shell is one of the major players in Nigeria, and with the civil unrest settling down somewhat and Goodluck Jonathan saying he wants to invest $7 billion in infrastructure, it is going to benefit from Nigeria wanting to increase its oil output to 4 million bpd from 2.4 million bpd currently and from the better infrastructure Goodluck wants to build. Plus, all of the Big Oil members have nice fat dividends to keep your investment growing, even if the global economy isn't.
While every nation that consumes more oil than it produces is part of the problem (especially the United States and China), there are those who will contribute more to the rise in price than others and there will be those who help keep prices lower (like Saudi Arabia). I think oil prices will rise in the long term, as consumption continues to outpace production. If you want to benefit from higher oil prices, look for exploration and production companies with high production growth rates or well established giants who are experts in the game. While higher oil prices aren't ideal, you should be prepared for them. The purpose of this article was just to shed some light on what has happened to the oil industry over the past decade and how important it is for America to stay ahead of the game and to keep producing more and more oil to get domestic prices low.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.