Tuesday, July 27, 2010

Global Oil Supply Now Contracting?

Update 8/13/10: global oil supply increased in July.  Original text follows:

It's too soon to remove the question mark from the end of the post title, but not too soon to be talking about the subject.

For a number of months now, I've been tracking the fairly rapid recovery in global oil production, after the end of the great recession.  I even pointed out that there was enough spare capacity in OPEC that it could potentially exceed the previous peak of monthly oil production back in July 2008.  I was careful to add this caveat, however, complete with bold font on the "if":
Therefore, if the global economic recovery continues, and in particular if OPEC is willing to restore their production cuts at prices that don't derail that recovery, then it appears likely that the July 2008 liquid fuel production level will be exceeded.
The data for the last few months now have me wondering whether the global economic recovery is not in fact continuing.  Here's the data from 2002 on:

The purple, plum, and green curves have the raw data (from the three agencies that track global production) with thin lines and squares, and then a centered moving average as the thicker smooth curves.  This shows the major features of global production since 2002 - the rapid rise following the 2000-2001 recession, and then the "bumpy plateau" after late 2004, with a bump up in late 2007 and early 2008, followed by the contraction associated with the great recession in late 2008 and early 2009, then the subsequent recovery.

You can also see inflation adjusted monthly oil prices on the right hand scale (blue curve).  This shows the oil price shock of 2005-2008, followed by the recession-induced sharp fall below $40, and then the recovery as OPEC cut production in late 2008.  Prices more or less increased after that until they peaked in April of this year and then fell in May and June.

Focussing in just on the period since the beginning of 2008, here are the three main sources of global production data, together with their average (the heavy black curve):

As of today, we have data for June from two agencies (OPEC and the IEA), and data through April for the third (the EIA).  OPEC and the IEA agree that production has been declining at least modestly since February (see blue circle), while the EIA currently shows the peak month in 2010 as March.  Overall, the average is down about 600kbd, or around 0.7% from the February 2010 peak.

The all-time peak in global production (so far) is within the green circle.  The fall due to the great recession corresponded to a 5% reduction in global production by the trough in May 2009.  This is context for the current 0.7% contraction, which is much smaller at this time.

In the short term, global oil production is a sensitive indicator of the state of the global economy, and I'm not aware of any other publicly available proxies for the overall state of the world's economy that are as timely.

In this case, given that prices are falling rather than rising, and that OPEC undoubtedly has some spare capacity, the question becomes one not about whether supply is struggling to rise, but rather about whether demand is faltering or even declining.

Whether this presages a renewed contraction in the global economy, a stagnation, or just a transient hiccup in the ongoing recovery, I'm not certain of yet.  But certainly each passing month of lower oil production will add to the concern.


Anonymous said...

There never really was a real end to the Great Recession, Stuart. We had what appears to be an 11% surge in "stimulus" which resulted in GDP numbers of 3% or so, meaning the real economy was probably still contracting by 8% or so during that time.

With the end of government stimulus or any significant cutback in the same, the contraction will resume in earnest.

People had simply acquired as much debt as they could possibly service, even in the best of times. Debt can only be (a) paid off, (b) defaulted, or (c) forgiven. Given the "jobless recovery" (what an oxymoron!!), I fully expect the rate of foreclosure to remain high, the rate of credit card charge offs to remain high, and for banks to hold cash in anticipation of future loan losses.

In fact, at the current rate of bank closures, we will have more bank closures in this "recovery" year than we had during the supposed height of the Great Recession. And I expect it to get worse as all we have done is transfer the bad debt largely from private hands to government hands around the world.

There will be further sovereign debt crises around the world over the next 24 months and there may even be a few sovereign defaults.

Against this backdrop, oil production can do little other than decline, regardless of what the actual reserve situation really is. And if peak oil is rearing its head, it will definitely complicate any genuine recovery once the debt load is brought back down to manageable levels.

Alexander Ac said...

Hi Stuart,

I tend to agree with Greyzone. That the supposed recovery is largely based in the debt (growing faster than GDP, see also China). And thus, it is unsustanable recovery :-)


Alexander Ac said...

And here is an today interview with JE Stiglitz - he seems to be more in real world than Krugman, although still quite optimistic:

Troubles ahead for world economy:


Steve From Virginia said...

Is oil poised to make another run at $90 a barrel?

Recall in May when both stocks and commodities (along with gold) were making bull runs before the Greek Debt Crisis pulled the plug. Or, was it the $87 oil that pulled the plug?

The big question is whether there is enough money in the various economies to support $90 oil? You will notice that the highest trend prices over time since Summer of 2008 have declined from +$145 to +$87 to the current +$78. The trend is lower highs, suggesting less funds available for oil over time: the world is becoming poorer.


Unknown said...

The one thing about Hubbert I don't buy is the demand side. We've seen what a temporary 5% drop in global productivity can do to slow production, and I'm assuming that demand relationship will have a mitigating effect on the speed of declining oil production. What I'm stuck on is how things will operate at a sustained 3-5% annual drop in global productivity to maintain, say, 8-10 more years of an oil production plateau.

Unknown said...

Should have said "3-5% annual drop in global *demand*..." Efficiencies will supplement productiviy losses in decreasing demand.

MisterMoose said...

If you stand back and look at the chart with the purple, plum and green curves, it looks like the long-term, smoothed-out line for production is approaching (or is just at) a peak. Hm-m-m... is that why they call it Peak Oil?

So the trade off seems to be:

1. Stay in recession and use less oil (letting the price of oil remain lower than it might have otherwise been) for a few more years, and then start running out, or

2. End the recession, start using more oil, pay higher prices starting now rather than later, and then run out of oil just a little sooner.

Does that pretty much sum up our predicament? That self-sufficient rural retreat with the windmill and solar panels is looking better and better every day...