A rocky year in the oil market approaches its end with important, if confusing, developments.
On Dec. 17, the Organization of Petroleum Exporting Countries acted with unusual clarity to defend the price of crude oil by cutting production. Many times in the past, the exporters’ group has announced cuts but not specified whether the reductions applied to quotas or actual production, which nearly always differ. OPEC’s 500,000-b/d September “cut,” for example, was an effort to enforce year-old quotas then largely ignored. In October, the group announced a 1.5-million b/d reduction without defining the baseline.
The latest move is less ambiguous. The cut, OPEC announced after a meeting in Oran, Algeria, will amount to 4.2 million b/d and apply to actual September production by the 11 members with quotas: 29.045 million b/d. The new target thus is 24.8 million b/d. That’s 1 million b/d below the group quota implied by the September and October reductions. More importantly, it’s 3.3 million b/d of crude oil below what the International Energy Agency estimates the OPEC-11 produced in November. If achieved and sustained into the first half of 2009, a production cut that large can reverse a contraseasonal build-up of crude stocks that began in October, about which the group is expressly and legitimately concerned.
Unintended help
OPEC may have received unintended help in its defense of the crude price from the US Federal Reserve. The day before the producers’ group acted, the Fed cut its target interest rate for overnight bank lending to an historic 0-0.25%. It also said it would buy government securities from banks to put cash into circulation. These aggressive efforts to stimulate the US economy will tend to weaken the dollar, which in fact plummeted in value after they were announced.
Early this year, unusual dollar weakness correlated with unusual oil-price strength. More recently, other forces, mostly plunging oil demand and grim economic news, have overwhelmed whatever relationship exists between those variables. Indeed, oil prices dropped after the Fed announced its interest-rate cut as traders reacted to other influences. As long as oil is traded in dollars, however, a dollar of diminishing value can only help efforts to shore up dollar-denominated oil prices if the other turbulence subsides.
While potentially related OPEC and Fed maneuvers thus coincided with unpredictable consequences last week, the US Energy Information Administration unveiled a forecast with more-lasting implications—at least for the country that leads the world in oil consumption. In the “early release” version of its 2009 Annual Energy Outlook, EIA sees a flattening of consumption of petroleum liquids through 2030 as use of biofuels grows enough to satisfy modest increases in total liquids use. As a result, net dependence on imports shrinks from 58% of total liquids supply recently to 41% in 2030. Last year, EIA projected import dependency in 2030 of 54%.
Consumption of natural gas, by contrast, grows in the EIA forecast, supported by robust gains in domestic production. The production increase, largely resulting from unconventional reservoirs, squeezes the import share of total supply to 3% in 2030 from 16% at present. Last year EIA forecast 2030 gas import dependency at 14%. With growth in total energy use slowing and the carbon intensity of fuels diminishing, the average increase in energy-related emissions of carbon dioxide falls to 0.3%/year from last year’s projection of 0.7%/year without any new policies.
What price?
So OPEC has cut production to strengthen oil prices. If successful, the move would impede economic recovery just as the Fed acts to stimulate recovery with a tactic that also might raise oil prices and thus, to some extent, work against itself. Markets have reason to be confused. Now, though, they’re mostly obsessed with economic torpor and swooning oil demand. EIA, meanwhile, sees structural change in the US oil and gas markets. Yet fossil fuels in its projection still represent 79% of US energy supply in 2030, when, because of growing global demand and limits on resource access, the price of crude reaches $130/bbl.
Ah, yes, $130/bbl oil. It seems like only yesterday.
