An interesting confluence of oil news this Wednesday morning, which highlights the emerging paradigm, at least according to the public proclamations of the concerned parties:

Oil must stay high if world to have enough supply:

Energy producers cannot halt a rally that has driven oil to nearly $120 a barrel and the world might have to live with even higher prices if it wants supplies for the future, exporters said on Tuesday.
ADVERTISEMENT

Three days of talks in Rome between producers and their customers drew broad agreement a weak dollar has pushed oil prices higher and that the cost of extracting more from the ground has soared.

One thing the 60 or so energy ministers and dozens of industry executives struggled to agree was that the price, which hit a record of $119.74 a barrel on Tuesday, was too high.

“The oil market is in a state of fear, if not panic,” said Shokri Ghanem, head of Libya’s National Oil Corporation, but he also said expensive oil was necessary.

“Prices will have to stay high in the long term to encourage exploration and production.”

Producers and consumers alike were worried, but for different reasons. Producers were nervous about falling demand and consumers dreaded economic collapse.

Capacity warning for oil producers:

The International Monetary Fund warned oil ministers on Monday that their expansion in capacity was failing to keep up with surging demand, leading to instability in the market.

John Lipsky, the IMF’s deputy director, told a meeting in Rome: “While oil demand has remained robust, the supply side response to rising prices has been disappointing.

“As buffers have dwindled, the oil market has become highly sensitive to news of supply disruptions or geopolitical events.”

Mr Lipsky said the spare capacity held by Opec, the oil producers’ cartel, was about half of its 1996-2007 average, or one quarter of its 2002 level, and was expected to remain limited for some time.

“Against this background, increased investment in the oil sector has a crucial role to play in improving the supply-demand balance and bringing greater stability to the market,” he told the International Energy Forum, comprising energy ministers and delegates of the world’s biggest oil producing and consuming nations.

U.S. says high oil prices risky to economy:

Oil prices that hit a record on Tuesday are clearly too high and not beneficial for the U.S. economy, a top U.S. energy official said.

The United States has been remarkably resilient in the face of expensive energy, but a rally on oil to more than $118 a barrel is an economic threat, U.S. Acting Deputy Secretary of Energy Jeffrey Kupfer told a news briefing.

“Oil prices are clearly too high. We are not happy with the prices or the direction they’re going in,” Kupfer said.

Echoing remarks last week by U.S. Energy Secretary Sam Bodman, he said the United States would not delay its plan to buy more oil for its Strategic Petroleum Reserves, in spite of the oil price.

Producer countries have blamed the weakness of the U.S. dollar for the strength of the oil market and have said supplies for now are more than adequate.

By contrast, Kupfer said fundamentals of supply and demand were a major factor.

“Fundamentals are tight right now … Our message is take a look at fundamentals,” he said on the sidelines of the International Energy Forum in Rome, which brings together producers and consumers

OPEC Lays It on the Line at IEF: ‘Increase Security for Demand’:

Organization of the Petroleum Exporting Countries (OPEC) Secretary General HE Abdalla Salem El-Badri addressed an audience at the 11th International Energy Forum (IEF), held in Rome April 21, where he spoke earnestly about the need for demand security in an “increasingly interdependent energy world.”

The oil is there, said Badri, particularly in OPEC’s Member Countries, but “minimizing uncertainty” by ensuring “appropriate demand conditions” is necessary to alleviate the investment fears of operators.

OPEC estimates the annual average rate increase of world energy demand to be 1.7%. Fossil fuels will constitute more than 85% of the world’s energy needs, because so-called alternative fuels do not have the wherewithal to maintain energy needs of this magnitude.

“There are no viable substitutes in such quantities on even the most distant horizons,” said Badri. Badri added that oil and gas will make up more than 60% of the energy needs of the world as the increase persists. The aforementioned annual average growth rate will bring worldwide production to 118 million bbl/d by the year 2030.

“Scenarios we have prepared, based on plausible higher and lower world economic growth assumptions, show that, even by 2020, there is an estimated range of uncertainty for required investment upstream by OPEC producers of around $270 billion,” said Badri. ” Without the confidence that additional demand for oil will emerge, and without the market signals that long-run prices are supportive, the incentive to invest can be affected.

U.S. oil firms want Libya exempted from terrorism compensation law:

One by one, top executives of American oil companies met privately over the past year with the Libyan leader Muammar el-Qaddafi - often in his trademark Bedouin tent - as they lined up contracts allowing them to tap into the country’s oil reserves.

But now, thanks to a law that threatens those deals, the new allies are working Capitol Hill. The American oil industry and the Libyan government, once a pariah in Washington, have hired high-profile lobbyists, buttonholed lawmakers and enlisted help from the Bush administration, all in an effort to win an exemption from a law that Congress passed in January that is intended to ensure that victims of terrorist attacks are compensated.

The provision allows victims of state-sponsored terrorism to collect court judgments by seizing foreign assets in the United States or money from those governments held by American companies doing business with them. If Libya loses a half-dozen court cases still pending, $3 billion to $6 billion could be at stake, according to lawyers’ estimates.

Let me see if I can sort this all into neat little conceptual bins.

The oil exporters claim:

• There’s plenty of oil on the market.
• The current price is mostly due to the crappy US dollar and commodity speculation, with some higher costs involved.
• There might not even be enough demand to guarantee us the profits needed to justify massive expenditures for future oil projects.

The importers claim:

• It’s supply and demand driving up prices.
• Prices are too high and will damage the US economy.
• There is (or will be, as soon as they make one up) a “good” reason to side with the oil company execs and treat Libya like a beloved, long-lost relative.

My take on all this:

• Of course supply and demand play a role, as do the struggling US dollar and commodity speculation. Part of that speculation is caused by internal US conditions–the low interest rates dictated by the housing sector implosion are pushing money from equities to commodities, for example. But another part of that speculation is caused by the drumbeat of OPEC leaders saying at every opportunity, it seems, that “the market is well supplied” and that they want to leave some oil in the ground for their future generations. Isn’t it stunning how they can drive up the cost of oil without shipping one drop less of it or threatening another country, militarily or economically, or anything similarly gauche? Their understanding and manipulation of the world market is brilliant.
• The oil exporters claims that they see weak future demand is absolute garbage. (See the self-contradictory quote above from Badri, in bold) They know the peak in world production is coming soon, and they know they’ll be making an ocean of money from their reserves. They’re finding every excuse possible to sell less oil now and more later at much higher prices, to maximize their profits. This is the the fundamental shift in the oil market: The peak in world production and the higher production costs are both now within the short-term planning horizon of the oil exporters. Their incentive has flipped from selling more oil now and assuming they can always do so, to selling less now and exploiting the tightening of the oil crunch.
• Of course the US will give preferential treatment to Libya or any other country that exports oil. What part of “the US imports two-thirds of its 20-plus million barrels per day of oil consumption” isn’t painfully clear?
• No presidential candidate in the US will have the spine to talk honestly about this mess. They’ll blather on about “achieving energy independence” and other fairy tales, while indirectly trying to save us from our oil addiction through greenhouse gas reduction measures, since that’s a much more palatable approach. It’s much easier to say we can solve a big, scary problem by doing less of a bad thing–emitting CO2–than it is to say we’re facing a permanent decline in the availability of a critical resource.
• We’re headed for much higher oil prices, even pre-peak. World demand won’t likely subside, and in any case, the oil exporters have made it abundantly clear what their incentives are for husbanding their remaining reserves.
• It’s more critical than ever in the US that individual consumers and voters wake up, get educated, and take action–from altering their own consumption patterns through voting for more enlightened candidates–because that’s the only way we can hope to approach a rational public policy in this country.

Update: See Where the Oil Rally Goes: Facts and Speculation for Jim Kingsdale’s take on the current oil situation. As always, I find myself agreeing almost completely with Jim.