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Houston oil expert says OPEC has no excess capacity After predicting $30 oil in April 1999, Michael Economides says supply interruptions could cause price to spike to $40 Kristen Nelson PNA News Editor
Oil supplies are tight, which will keep oil in the $30 a barrel range for the short term, and because OPEC has no excess capacity, small events could trigger oil price spikes to as much as $40 a barrel.
That was the near-term forecast by University of Houston Professor of Chemical Engineering Michael Economides in talks in Anchorage Sept. 11.
“OPEC excess capacity is a thing of the past,” he said.
Fifteen years ago OPEC had 20 million barrels of excess capacity, but Economides said the argument today is whether it’s 2 million or 1 million or zero. Essentially, he said, it’s zero.
Saudi Arabia has the potential to produce more oil, but it would require massive reinvestment, he said. And forget about those frequently cited $2 a barrel lifting costs — the reinvestment cost would be $3,500 for any incremental barrel of oil that comes on line, “so for a million barrels that’s $3.5 billion of new investment in Saudi Arabia.” Possible $40 spikes When Economides and Ronald Oligney, co-authors of “The Color of Oil,” talked about $30 a barrel oil in their regular Houston Chronicle column April 4, 1999, Economides said the response was “a full frontal attack” because the crude price was just starting to come back from single-digit prices and it was popular to talk about a world awash in oil and to predict $5 a barrel prices, not $30 a barrel prices.
Right now, he said, “the margins are so tight that any penny-ante event may actually shoot the price way above $40.” A coup in Iraq, a hurricane in the Gulf of Mexico or two or three days of really cold winter weather in the Midwest — “any one of these events at the current level of the oil stock that we have … could shoot the price way up.” Management geared to $10-$12 oil “I have been very critical,” Economides said, “of the management of the super majors.” The companies stripped down for $11 a barrel oil, he said, and now the focus is on how to survive at $10 a barrel oil, and the companies don’t have a scenario for $30 a barrel oil.
“R&D in the petroleum industry today is ridiculous … don’t let anybody tell you that any R&D is happening in any of the major R&D centers today in the upstream petroleum industry,” Economides said.
The major oil companies have tied themselves to the old economy: “in an almost perverse manner they want to thrive in this $12 oil,” he said.
Economides said he expects to see an oil price equilibrium at about $23 a barrel — but even at $30 a barrel, he said, the U.S. economy would survive. One-third of the economy used to be connected to energy, but only about 10 percent is now.
Calculations he has seen, Economides said, indicate that “we could tolerate $30 oil for a very long period of time without an impact on the economy.”
The three super majors, he said, are two and a half to three times the size of OPEC based on sales. OPEC produces 25 million barrels a day of oil at $30 a barrel for 365 days a year for an economic impact of $260 billion a year. “That’s the same size as Exxon,” he said.
And the significance of that size is apparent, Economides said, when you realize that the TotalFinaElf combination produced a company only about one-third the size of the big three. If you combine the next-largest 15 companies, he said, you wouldn’t have a company as large as a super-major.
As for the rumored merger between Phillips and Chevron, Economides said he didn’t think Phillips had a problem beyond its debt service.
But, he said, “if you’re going to go out there … and have a chance in the future … you’re going to have to be able to raise quite a lot of capital.” That, he said, is where smaller companies will have a harder time compared to the super majors.
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