Congress Blames the Hedge Funds, Part II: Indonesia to OPEC…’See ya!’

Hi Jeff,

Did you see the news about Mexico? Look at this Reuters UK article about Mexican production in April. Output from Cantarell, Mexico’s biggest field, is falling through the floor. That, coupled with rising domestic consumption, means Mexico might go from the second largest source of US imported oil in 2006 to a net importer as soon as five years from now.

Via Yves Smith’s blog:

“Global Oil Production 2007 is 85.6million barrels per day… times 365 = 31.244 Billion per year. While annual Brent Crude trade volume is worth roughly 57 billion bbs”

As the blog points out, Brent is only one type of crude traded…yet its annual volume is double what is produced in the physical world, so I hope everyone gets where this is going.

Instead of paper hoarding, it would be great if that capital was allocated to become productive…i.e. invest in the procurement of oil fields, land, alternatives, etc.

Tying this money up is a total waste of capital.

Of course, on the contrary, high prices have spurred E&P etc…but at what cost?

China, India, consumers are bleeding from their ears. In addition, there is a dilemma between investing in alternatives vs. investing in traditional…that’s b/c they’re still clearly both viable on a physical level, yet the paper level they are not.

Physical markets take forever to adjust…not only b/c they are capital intensive, but also b/c demand is highly inelastic…meaning consumers take time to adjust, too.

However, paper markets adjust in an instant, therefore inflicting maximum pain, given physical and paper market’s eggregious intertemporal adjustments.

That’s why crude markets need to be regulated. There are massive unintended consequences at work here.

Now, that is not to say, there won’t be unintended consequences the other way, but as the world runs out of oil, XOM and other real “commercials” should bid the prices back up based on their appropriate time frames. Gradually allowing consumers and producers to respond.

I have a problem understanding the bit about how Indonesia has been OPEC’s only “Asian” member. Huh? What’s the definition of “Asia” that excludes, say, the UAE or Saudi Arabia?

Jeff: I think this post is quite illuminating, both on Shell and, to a lesser degree, on Indonesia.

Shell, as your readers may know, is an international oil company whose strategy is to “…focus on the faster-growing markets of Asia Pacific,” of which Indonesia is a part.

Since Indonesia recently came out and declared itself an “oil consuming country”, Shell will need to “pour on the capital” to find and develop significant reserves from oil sands for example and meet the energy demands of Asian-Pacific countries like Indonesia.

The problem, however, as Shell neatly describes in its Scenarios report, which I’ve included a link to here, examines the possibility of oil consuming countries “scambling” for oil supplies, where contries like Indonesia will need to act quickly and find supplies of oil from non-OPEC countries (hello, Norway) to meet its growing demand.

Shell has recently taken steps to improve its oil reserves faster than depletion, which bodes well in the near term for Shell’s consumers. (I am not making this up – readers can see for themselves by visiting Shell’s website and search for the March 2008 Strategy Update).

Long term, however, I wonder what will happen when consuming oil countries like Indonesia and, I might add, the US, find that unilateral deals between oil consuming countries and the energy producers who supply them, drive the price of oil to such a magnitude that energy policies are finally developed which focus on demand rather than supply?

Another great post Jeff!