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Oil at $200

The story right now is that the “war” premium – caused by Middle Eastern instability is around $30; oil should be priced around $80 -- $90/bbl, instead of the $125/$110 we are seeing in the Brent and WTI markets. One of my favorite bloggist is EarlyWarning which discuses a range of issues but seems to have built a very interesting side business in looking at the Middle Eastern oil production market.

Readers will remember my commentary a few days ago that the Saudi oil minister had indicated that because of glut the Kingdom was reducing production from 9 million to 8.5 million bbl/day.  

 (Source:  Early Warning)

Early Warning looking at some third party data noted a number of interesting facts:  Rig count which had been declining for years has been rising in the past quarter.  Halliburton, one of the companies involved in drilling in the Kingdom indicated that most of the rigs were being deployed on older fields (that’s how you increase production), but also that long dormant projects were being re-activated.  Early this week the same oil minister indicated that it was unlikely that the Kingdom could increase production beyond its peak 9.5 million/bbl/day within the next five years.

Now if you read the Early Warning blog you would get all that, and since he’s a better writer than me… My focus remains Canada, with it ever increasing production of oils ands (the new production doesn’t involve tailing ponds), and the impact on North American energy security.  The Americas are in a position to be independent from the Middle East with regards to energy supply (prices are another issue), with Brazil’s new giant discovery (which make some of the current deep ocean drilling look like child’s play), Mexico (if they can get their act together and begin re-investing) and Venezuela (Chavez is not immortal) and Canada there is scope for energy security.  

The price side of the equation is something else, if it is true that Saudi Arabia will not be able to increase production beyond 9.5 MM/bbd/day until 2017, there is a major piece of the “assumed” production segment missing – because this has always been the bet, that despite demand/supply balance, there was always the perception that the Kingdom could increase production in a pinch, being the swing producer to keep the balance between supply and demand in place.  However, this is not the case, demand for oil is certain to keep on rising from BRIC countries as their economies are economies are on fire, in the case of China the current drought (one of the most severe) and coal shortage will force the country to import more oil (despite the treat of rolling blackouts).

Even if America slows down – gas price is now above $4 a gallon --- and expected to reach $5 during the peak driving season, the reality is that high (and even higher) oil prices are her to stay, because the supply side of the oil equation is no nearly as clear cut (and simple) as many analysts would like people to believe.  

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