Tuesday, June 14, 2005


Hitting the Wall

Reuters is running an article about OPEC hitting the wall. Rising gasoline prices have prompted gasoline consuming nations to request that OPEC increase its supply. OPEC has responded by officially saying that it plans to or is considering planning to raise supply. However, the OPEC President, who is also the Saudi Oil Minister, has said that the move is "just symbolic." Producers will not be able to increase output in the short term. According to Libyan Energy Minister Fathi Bin Shatwan, "Everybody in OPEC is at full capacity -- maybe Saudi Arabia has something left but it is heavy oil -- so in practical physical terms we have nothing." By heavy oil, Bin Shatwan means oil that cannot be converted to gasoline economically with current refining technology. Additionally, the Saudis have spare capacity for high sulfur oil, but that also requires special refining in order to be used as gasoline in Western nations because of the pollution problem it presents.

Recently President Bush has suggested that closed military bases be used as sites for new oil refineries. Initially this suggestion didn't make much sense to me. In light of the news from OPEC that the oil production capacity they have is for oil that we can't turn into gasoline, the President's suggestion makes more sense. It's not just that he believes we don't have enough refineries. I assume he believes that we have the wrong type (i.e., old) refineries which, increasingly leading to further gasoline shortages as the oil producers are able to produce less light, sweet crude and only have left the heavy, sulfurous crude. We'll need new refineries because the old ones won't have the requisite input.

My assumption is that the land the closed bases are on will be given or veritably given to oil refiners as an incentive to build newer refineries in the name of a secure national energy policy.

I do wonder what OPEC's hitting the wall bodes for the future. The Reuters article reports analysts’ projections of oil prices hitting a record of $60 per barrel soon. This apparently worries the Nigerian Presidential Adviser on Energy who said that as prices rise OPEC worries about the health of the global economy and about the potential development of cheap alternative energy which could undermine their business. Ostensibly OPEC would like to produce more, but is unable. Whether oil producers will be able to increase output eventually is not addressed in the article. I wonder if articles like this about a major Middle East oil field approaching depletion and underperforming quota won't become more common.

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