DEVELOPMENTS IN THE ENERGY SECTOR
by Joseph Dancy, LSGI Advisors, Inc.
Adjunct Professor, SMU School of Law
February 2, 2006

Several developments worth noting have occurred in the energy sector over the last few months:

• The International Energy Agency cut its forecast for global oil demand this year due to a mild winter in the U.S. and Europe. World demand is still forecast to rise 1.6 percent this year to 85.77 million barrels a day, 160,000 barrels a day less than it predicted one month ago. The agency also lowered its forecast for 2007 oil production outside the Organization of Petroleum Exporting Countries. 

• Rumors of production capacity limitations or declines in the world’s largest crude oil fields have been debated by a number of energy experts. Due to the fact that many of these large oil fields have been nationalized accurate data is difficult to ascertain. Recently Mexico admitted that production from the Cantarell field was rapidly declining (see charts at right). 

• China surged past Japan last year to become the world's second largest vehicle market after the United States. Car purchases in China jumped 37 percent. Japan's total vehicle sales last year declined slightly from 2005

• China's oil imports surged by 14.5 percent in 2006 according to figures reported by the government. China imported just over 1 billion barrels of crude last year, or an average of 3 million barrels a day. China is one of the world's biggest oil importers and its needs are expected to grow as economic growth continues. 

• Last year the United States imported 60 percent of the oil it consumed. Domestic crude oil production has fallen sharply since the mid-1970s, but the Energy Information Administration expects oil production to rise to almost six million barrels a day by 2017, up from a little over five million barrels a day now. Experts in the energy industry question these production assumptions in light of decades long decline in U.S. crude oil production. 

• Daily output at Mexico's biggest oil field tumbled by half a million barrels last year according to figures released last month by the Mexican government. The virtual collapse at Cantarell -- the world's second-biggest oil field in terms of output at the start of last year -- is unfolding much faster than projections from Mexico's state-run oil giant Pemex. Cantarell's daily output fell to 1.5 million barrels in December compared to 1.99 million barrels a year ago  according to figures from the Mexican Energy Ministry.

Sprout Asset Management had an excellent summary of the energy sector in a report they issued last month:

. . . The fundamentals for oil continue to be highly favorable. In fact, the issues the oil markets face are staggering. As we’ve already mentioned, Chinese and Indian demand for oil threatens to grow exponentially as they continue to build the wealth to become consumerist societies like the West. Furthermore, the supply side of the equation continues to face daunting issues. North Sea production, at one time representing 8% of world oil supply, has peaked and is declining precipitously. Norway recently dropped its forecast for 2007 oil production by 15%. Britain’s crude oil production, which peaked before Norway’s, fell 15% last year. Mexico’s Cantarell oilfield, the second largest in the world, fell 10% or 200,000 barrels per day in a six month period. 

British Petroleum, one of the largest oil companies in the world, recently reported the sixth straight quarterly decline in oil production, losing 400,000 barrels per day in the past year. A mechanical problem on the Hibernian platform resulted in 80,000 barrels per day being temporarily taken out of production. Venezuela is threatening to nationalize its oil industry and kick foreign companies out. The Middle East (Iran, Iraq) remains a powder keg of instability and threatens to become only more so in 2007. A dispute between Russia and Belarus almost took 1 million barrels per day of oil off the market. These factors are rarely incorporated by analysts in supply models. 

© 2007 Joseph Dancy
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Joseph Dancy, Adjunct Professor
Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter
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