Riding oil’s unpredictable roller-coaster


There are a few statistics regarding oil production and consumption that have seldom been mentioned during the debate on the collapse of oil prices over the last six months. Yet these numbers explain much of the mystery surrounding this event.

In 2005, the U.S. imported roughly 14 million barrels of foreign petroleum every day (MBPD), making the U.S. the largest market for foreign oil producers. However, way back in 2011, the American Petroleum Association was forecasting that the U.S. would become, by 2015, a net exporter of oil, for the first time in multiple decades. The second statistic to note is that the total global production of petroleum, in 2005, was approximately 85 MBPD, a number that has increased to nearly 95 MBPD by the end of last year.

What does all of this mean? Simply this: in the last 10 years, total production of oil has increased by 10 MBPD, yet the world’s largest consumer is no longer buying the 14 MBPD they used to buy 10 years ago. The result is that 24 MBPD, every day, are being produced without any apparent customers for this product.

Now, of course, oil consumption has increased in other countries over the last 10 years, with nations such as China heading this list of increasing consumption, however, the total increase in global petroleum consumption has only been about 10 MBPD over the last 10 years.

In summary, there are now nearly 15 MBPD being produced for a customer that no longer exists. And we are surprised that oil prices have gone down?

The apparent global production of petroleum is approximately 17 per cent higher than global consumption. With oil being a relatively “pure” commodity, even a one per cent variation between production and consumption can have a dramatic effect on pricing. If you don’t believe me, ask any wheat farmer in Alberta. The agricultural industry knows, painfully well, that production and consumption must be in lock step with each other, otherwise, any variation in one of these factors will generate a violent response in prices for the other factor.

Now, I’m no prophet, economist, forecaster, or petroleum expert, but I do have to admit that I first heard about the U.S. reaching self-sufficiency in oil production nearly three years ago. I recall thinking at the time that this fact represented a major change in world oil patterns, and nations would need to balance production very carefully, or they ran the real risk of burying the planet under millions of barrels of unwanted oil.

Well, it now appears that the economists, forecasters, and other associated experts aren’t nearly as smart as we had previously assumed. Instead, they apparently buried their collective heads in the sand, and prayed that some new mystery buyer was suddenly going to appear and suck up all this unwanted petroleum. As anyone with any common sense knows, there was no mystery buyer, there is no mystery buyer, and it’s highly unlikely there ever will be a mystery buyer.

If the Alberta government needs to cut expenses, it should start by firing all the budget clowns they have on staff – the same clowns who couldn’t figure this out in the first place.

There’s an old saying that all political movements go too far, and economic movements are the same. Good old human greed will intervene, shortly, production will begin to drop, then it will drop too far, and prices will skyrocket again. As everyone in Alberta should know, oil prices are a nasty little roller coaster. But you can survive-just follow the rule that applies to all roller coaster riders hang on for dear life and don’t try to get off.

Brian McLeod is a long time resident of St. Albert.


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