The Oil Supply Bubble

While most chatter in the popular press is about the prospects for a “super-spike” in oil prices, count on the Economist for a contrarian view:

Julian West of CERA, an energy consultancy, has compiled a list of all of the oil projects, led by both government companies and by private firms, that are due to come on stream over the next few years, “all found, all commercial, and all economic at half today’s price.” He calculates that this “river of supply” could lead to a dramatic net increase in global oil production, with 2007 perhaps seeing the largest rise in production capacity in history. By 2010, this might add 13m bpd to the 2004 total of 83m bpd. Not everyone agrees with his assessment, and Mr West himself cautions that geopolitics could choke off this pending supply, but otherwise “the supply problem in two to four years will be too much oil.” [Emphasis added]


  1. George Bush’s energy adviser Matt Simmons claims the global economy has misjudged oil supply
    AS President George W Bush strolled around his Prairie Chapel ranch in Texas last week with Saudi ruler Crown Prince Abdullah, oil prices were high on the agenda during talks between the leaders of the world’s biggest energy consumer and largest oil exporter.
    At the same time, Matt Simmons, one of Bush’s energy advisers, was at a conference in Edinburgh, spelling out harsh facts on Saudi oil production which, if proved true, would have severe repercussions for the global economy.
    Simmons’s belief is that Saudi has been overstating its oil reserves for years, its biggest oil fields are in decline and it will struggle to live up to its promise to crank up daily output from around 10 million barrels a day to 12 million by 2009 and later 15 million to meet global demand.

  2. Lovely, and that sort of disagreement is what it takes to make a market. But that said, I’d sure like to convince myself to take the other side of this oil-is-in-decline trade — there are an awful lot of takers.

  3. >>> What it takes to make a market <<<
    Yup, somebody out there has been selling short the oil futures, and i’m sure it’s not all hedging by the oil firms.
    Oil seems to be tricky trade. Short term factor to watch is the Chinese subsidizing gasoline purchases by consumers and what happens if they stop. Barry Ritholtz did an execellent series of post on oil last week, and discusses this issue in this post:
    But, long term, the factor to watch is probably capacity vs. demand, like the graph on this Kevin Drum post:
    Personally an oil trade is too iffy for my taste, and i like a dollar bet. Wait till Warren Buffet and Bill Gates are at their maximum pain threshold, and THEN start shorting the buck. :-)
    It’s like when Jim Cramer starts pulling out what’s left of his hair on a trade, saying “this stock should not be down this far … this is a GREAT company.” It’s usually at that point, or week after that the stock takes off.