In 1978, I flew to Europe to visit a college friend who worked in London. An oil-trader friend of his from Paris flew in for a weekend restaurant tour with us. When I asked the man what he did for a living, he replied confidently “I f*** the world”. I was shocked then, and even more-so today.
If data by the United States Energy Information Agency (EIA) is reliable, there is no actual shortage of either oil or production capacity in relation to consumption.
Between 1980 and 2004, world consumption increased by 30.8%[8], while U.S. consumption increased only 21.5%[9]. World production increased 23.2%[10], but U.S. production actually decreased by 40.3%[11].
In terms of world static supply and demand, in 2004 73,387 thousand barrels/day (TBD) of oil were produced,[12] against demand of 82,594 TBD consumed. [13] This would leave a 12% structural deficit. However, looking at 1980 world data, we also see a 5.7% deficit: 59,557 TBD were produced [14] against consumption of 63,113 TBD. [15]
The EIA data suggests a long-term physical impossibility: world consumption has been actually outstripping world production for many years. I conclude there is data missing from EIA reports. This could consist of under-reporting of production, over-reporting of consumption, or perhaps both.
World distillation capacity rose 81% from 47,049 TBD in 1970, to 85,304 TBD in 2007. However, distillation capacity increased only 6.7% between 1980 and 2007. [16] It is interesting to note that the EIA reports 2007 distillation capacity of 85,304 TBD, which factoring-in demand growth, is roughly in-line with 2004 consumption of 82,594 TBD (post-2004 consumption data is not available yet.
In the United States, distillation capacity actually decreased from 17,988 TBD in 1980 to 17,397 TBD in 2007. The lowest point in U.S. distillation capacity occurred in 1994, when capacity was only 15,034 TBD. [17]
Proven reserve data suggests a very positive future outlook. Proven U.S. reserves rose 734% from 29.81 billion barrels in 1980 to 213.32 billion barrels in 2004. [18] Proven world reserves grew 204% from 644.93 billion barrels in 1980 to 1,317.44 billion barrels in 2007. [19]
Now, we look at spot-market oil prices. In 1974, oil cost about $5 per barrel. By January, 1980 oil nearly quintupled to $24 per barrel. It dropped to a low point of $9.50 in 1999, skyrocketed to $58 per barrel in 2005,[20] peaking at $69.52 in August, 2006.
We see that oil prices exploded 173% between 1999 to August, 2006. [21] This is a breathtaking change for a necessary commodity.
Is there really a shortage? We can say conclusively that we have not seen gas lines in any free world country. This suggests there is no actual shortage in either the United States or the world.
Here is what we can take away from the above information:
- U.S. oil companies cut back U.S. distillation capacity substantially between 1980 and 2004. This seeded fears. Spot market prices rose tremendously, thus increasing profits to oil companies.
- U.S. oil companies decreased stateside production 40.3% between 1980 and 2004, driving fears about dependence on foreign oil, and creating an illusion that shortages were imminent.
- These two items, in conjunction with speculative manipulation of the spot market by banks and pension funds, caused oil company profits to soar. The world’s three largest oil companies netted profits of $172,000 per minute during the second quarter of 2006. Profits going forward look similarly bullish. [22]
The Effects of Inflated Energy Costs
Enronesque oil speculation disproportionately affects low-income Americans to the immediate benefit of oil companies, governmental bodies, and upper-class investors. The poorest Americans can least afford transportation, thus marginalizing them.
Economists believe that maximizing private retirement funds will result in lower demands on Social Security as baby-boomers retire. However, the high present-day cost of oil decreases what individuals can afford to contribute to their retirement funds – perhaps taking marginal investors out of the contemporary investment picture entirely.
