Russian oil decline accelerates & other supply concerns

Dennis M. — Thu, 08 Jan 2009 21:49:42 +0000

With the price of oil pretty low below $45 per barrel and global demand falling, it seems to be a silly time to bring up supply worries. But recent numbers on Russian oil production and some other major non-OPEC producers show we need to keep our eye on this biggest source of world energy. Russian oil output has been down throughout 2008 but a recent article reported that declines accelerated in December, from a less than 1% decline to a 1.6% decline. Countries like Mexico, the UK, and Norway had similarly low decline rates before their production started tanking at current rates as fast as ~10% per year. If Russia were to begin declining at a similar pace, the tale of peak oil production may become a reality very soon. The risk is that non-OPEC production would fall so much that OPEC would have almost complete control of the oil market and allow prices to rise beyond their highs of last summer.

A Little Historical Background

Non-OPEC production has been on a rough plateau since 2004. It fell slightly in 2005 then increased a bit in 2006 and 2007. For 2008, the US Energy Information Agency (EIA) predicted that non-OPEC production would increase ~1 million barrels per day. Non-OPEC producers certainly had a price signal from high oil prices to increase their production in 2008. But instead, overall non-OPEC output was down ~300,000 barrels per day (b/d). In December, the EIA predicted an increase of ~400,000 b/d — with much of that occurring in the US, Brazil, and Azerbaijan. Such an increase would require OPEC producers to keep their production at current levels or to drop even further to maintain current prices amid the recession.

But the non-OPEC production increase the EIA expects could evaporate just like in 2008 or even worse. Norway expects its oil production to fall ~9.7% — which means a drop of ~200,000 b/d. Mexico expects production ~3 million b/d, or a drop of ~170,000 b/d. The UK will probably fall at least another 100,000 b/d. And now Russian production is more suspect. If their output falls 2%, that means a drop of ~200,000 b/d. That 700,000 b/d of non-OPEC declines may be difficult for other producers to offset. And the low price signal supports little new production to offset mature field declines.

US production is projected to increase by ~400,000 b/d on less hurricanes and some new fields ramping up. But the first week of US production was below its 2008 level — so we will have to see big change for EIA projections to become reality. The supply constraints do not equate to a scary first half of 2009 because demand has fallen so dramatically. But if economic recovery tries to pick up in the second half of this year or in 2010, we shouldn’t count on large increases in non-OPEC oil to fuel it.

Bottom line: The potentially declining non-OPEC supply picture is another reason we should all help Obama transform the US energy system through a Green Stimulus Package. Economic growth can be securely built on the efficient use of renewables for future demand growth and through substituting some of the carbon-emitting fossil fuels upon which we now depend.

Onwards in the Sustainable Energy Transition!

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Russian oil decline accelerates & other supply concerns