How to Use This Report

Petroleum Section

The price of petroleum has risen because global excess production capacity (maximum possible production rate less demand) has been shrinking.  A significant amount of petroleum is supplied from regions of the world that are susceptible to supply interruptions.  Violence in Nigeria, strikes in Norway and hurricanes in the Gulf of Mexico are examples of how a significant amount of production can be quickly lost.  As a result, the global supply network must maintain readily available excess capacity.  Most of the spare excess production capacity is in OPEC countries.  At the present time, only Saudi Arabia has significant excess capacity, but that capacity is being squeezed by increasing demand.

Excess global production capacity has shrunk primarily because of the unanticipated rate of increase in global consumption.  The growth in both China’s and India’s economies has spurred an increase in demand for petroleum. 

The world also needs additional refining capacity to process more oil.  Few new refineries have been built in recent year and construction of new refineries takes many years to complete.  As a result, the capacity to refine petroleum products has been squeezed.

Issues to Monitor:

• Major oil production projects will be coming on line over the next several years.  The cumulative impact of projects starting in the same year can move the market.
• OPEC meets regularly to set its output quotas.  The quotas are routinely exceeded by its members.  At the present time, OPEC has essentially no more production that can be sold into the market.  As production ramps up over time and consumption growth slows, OPEC will be faced with a challenge of maintaining its desired price range.  Most countries will be reluctant to cut production if prices fall because a production cut will further reduce revenues.  Saudi Arabia will likely be the swing producer to maintain world prices.
• Plans to build new refineries are being announced, however, it will be several years before that capacity is available.  The world will struggle to keep up with demand for gasoline, heating oil and diesel products.  Global inventories (especially U.S. inventories) are monitored because the stocks provide the ability to meet seasonal demand swings and interruptions to the production and refinery supply chain.  Inventories below minimum historical levels put upward pressure on prices.  Conversely, inventories above maximum historic levels put downward pressure on prices.