Two weeks ago, Investor’s Business Daily ran on op-ed titled “The Ship Turns” which made the case that dramatically higher crude oil prices are changing the supply/demand equation.
According to data from a variety of sources, world oil output has jumped by 11%, or 8.5 million barrels a day, since 2002, to 83 million barrels a day.
Contrary to the predictions of petro-paranoids, private oil companies are producing flat out — even though government entities such as the Organization of Petroleum Exporting Countries and the U.S. Congress work to keep prices high.
Fueled by the high prices, new sources of oil are being discovered. They include the 33-billion-barrel bonanza recently found off Brazil’s coast and other huge finds in the Caribbean and Asia. The U.S. itself has 656 trillion cubic feet of natural gas and 112 billion barrels of oil on federal lands alone — there for the taking if only Congress would allow it.
But even without it, we’re going gangbusters. As the American Petroleum Institute recently noted, “an estimated 4,577 (U.S.) oil wells were completed in the first quarter of 2008, up 12%” from last year and the highest rate since 1986. U.S. oil companies are going back to tapped-out wells and pumping oil that wasn’t economically recoverable at $25 a barrel but is at $100.
U.S. fuel demand in the first three months of 2008 was down 1.4% from a year earlier — the third straight quarterly year-over-year decline in a row.
Gasoline consumption has risen about 1.5% a year since 2000. But Energy Department data showed demand in the first quarter edging down for the first time in more than two decades.
In short, the tide has turned.
The New York Times notes that U.S. car buyers have suddenly gone ga-ga over small cars. One in five purchases is now a compact or subcompact, while SUV sales are off 28%. “It’s easily the most dramatic segment shift I have witnessed in the market in my 31 years here,” said George Pipas, Ford Motor’s chief sales analyst.
Meanwhile, Market Vane‘s Bullish Consensus is 86% on crude, showing extreme optimism. T. Boone Pickens was interviewed on CNBC this morning and expects $150/bbl oil. And now crude oil for 2016 delivery is higher than spot prices, a rare event and sure sign of speculation. This contango situation in the futures markets is all the more notable considering the onset of peak driving season is days away. The spot contract is saying there is plenty of oil available at these prices, perhaps a sign that demand destruction has, in fact, occurred.