Jetrader - September/October 2008 - 22

Boiling Points The “Hard” Factors Behind the Run Up in Oil Prices By Steven T. Gaal, President & COO, SkyWorks Holdings, LLC T factors he factor contributing to the historic and meteoric rise in the price of oil have become topics of signiﬁcant debate. The steady decline of s dollar against the major world currencies the U.S. d and speculative behavior are cited as some of the specu primary causes. Oil ministers at certain of the ca major oil producing nations have publicly stated there is no fundamental reason for the run up and that current supplies are sufﬁcient, supporting the curren view that “soft” factors are largely to blame. “ Reports in the media have highlighted the availability of billions of barrels of oil reserves adjacent to the coastlines of the U.S., as well as t from tar sands and oil shale in North America— indicating that additional supplies are within reach. However, a closer look at the dynamics of the oil market indicates that the “hard” factors of supply and demand appear to be major contributing forces to the record increases in prices. Namely, there is mounting evidence that unabated demand growth from emerging economies will cause total world demand to break through the feasible limits of production capacity. Mounting Supply Concerns Tensions in the Middle East, attacks on oil ﬁelds and labor strike actions are factors that have caused supply concerns in the world oil markets. The most problematic issue igniting supply fears among energy analysts is the declining production rates of the world’s existing oil ﬁelds. It is well established that after an oil ﬁeld is fully ramped up, the ﬂow of oil from that ﬁeld will gradually decline as the well ages and its reserves become depleted. The problem facing the oil industry is that most of the world’s largest producing oil ﬁelds are on average more than 20 years old and well into the decline phase of production. Various energy research ﬁrms estimate that as a whole the world’s existing oil ﬁelds are suffering at least a four percent rate of decrease in annual production. Since world oil production approximates 80 million barrels per day (bpd), the industry needs to ﬁnd more than three million bpd of new capacity every year just to break even before meeting incremental demand. As shown in Exhibit 1, much of this gap has been met over the past several years by eating into the cushion of known OPEC surplus production capacity, which averaged 4.3 million bpd from 1998 through 2002 but only 1.6 million bpd from 2003 through 2007. Exhibit 1: OPEC Surplus Production Capacity & World Production/ Consumption1 There is limited evidence of additional near-term supply sources that will produce meaningful levels of new production output. Saudi Arabia is one of the noteworthy examples where incremental production may be achieved, though debate exists around the degree to which this can be achieved. Otherwise, we will need to see changes in the political arena, e.g., exploration and 22 The ofﬁcial publication of the International Society of Transport Aircraft Trading

Jetrader - September/October 2008

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