The supply of crude oil is heavily impacted by operational capacity, declining available inventory, and a demand trend that is beginning to outpace the available supply. On the demand side, increased consumption, ever increasing pricing, and economic growth are factors influencing the demand for crude oil. Going forward, it will be interesting to watch the market as both private and public interests try to cope with high energy prices. Record high prices could test the resolve of the U.S. representative consumer as well as the global consumer.
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From November 2006 through November 2007, U.S. crude oil rotary rigs in operation have increased over 18%, from 281 to 341 rigs. At the same time, crude oil wells drilled for exploratory purposes have increased close to 25%, from 48 to 60 wells. Crude oil wells drilled for development purposes have increased over 27%, from 1,044 to 1,327 wells. Additional operational increases are expected in the Gulf of Mexico, pending delays due to labor or equipment shortages and current production level uncertainties.
Crude oil inventories, as measured by the OECD (Organization for Economic Co-Operation and Development), are expected to fall, under the assumption that OPEC maintains its production decisions based on recent 5-year average levels going forward through 2008 and 2009. New projects in the Gulf of Mexico are projected to offset declines in U.S. onshore production in Alaska and the lower 48 states. Through 2009, domestic production is expected to increase as a result of high crude oil prices. For the 12 month period ended October 2007, U.S. crude oil field production has declined 1.33% while both imports and exports have also declined over the same period – approximately 3.6% and 70.75%, respectively.
In 2008, world oil demand is projected to outpace oil supply from countries outside OPEC. This could cause OPEC to adjust production and it could also leave some countries tapping into their crude oil inventories. Through 2009, supply pressures might ease as higher levels of production are expected from non-OPEC countries and OPEC is expected to add to its surplus production capacity with new projects.
According to the EIA, global demand for crude oil is expected to increase through 2008 and 2009, stemming mostly from higher levels of consumption, measured by the OECD, especially within Europe. Over the next 2 years, the EIA expects that continued strong economic growth will drive higher levels of consumption in non-OECD markets, such as China and the Middle East.
Motor gasoline, a derivative of crude oil, is expected to experience consumption growth as the cohort of eligible drivers in the U.S. increases at a faster rate than renewable fuels and biofuels and technological advancements for efficient fuel consumption. Furthermore, the EIA suspects that spillover effects into the retail motor gasoline and diesel markets, caused partly by the high price of crude oil, will bring about average motor gasoline and diesel prices of over $3 per gallon in 2008 and 2009. Coupled with the seasonal effects of increased driving activity in the spring and summer, prices could reach an average of $3.50 by mid 2008.
Throughout 2007, the spot price per barrel of WTI crude oil has increased close to 58%, peaking at $99.29 by the end of the year. The EIA predicts that the price per barrel of WTI crude oil will begin to decline, falling to the mid to high $80's through 2008 and then to the low $80's in 2009. As a result of high crude oil prices, there could be increased general inflationary fear in the U.S.
Global spot prices per barrel, as measured by weighted average using estimated exports by country, have increased over 60% from December 2006 to December 2007. Meanwhile, OPEC spot prices per barrel have increased over 80% during the same time period.
According to the 2008 Annual Energy Outlook (AEO) published by the EIA, domestic economic growth is expected to slow down to approximately 2.6% per year through 2030, which is lower than previous reports. Compared to 2007, which attributed the decline in economic growth to labor force and labor productivity factors, the revised growth rate for the AEO 2008 report is mostly due to a reduced labor productivity growth rate. There are, of course, other factors which might impact economic growth outside the scope of this current issue.