I’ll let figure out what IFOS is. Per the FT:
The Organisation of the Petroleum Exporting Countries on Wednesday warned that President George W. Bush’s proposal to reduce US dependence on Middle Eastern oil could badly jeopardise needed investment in Gulf oil production and refining capacity.
No. OPEC itself is jeopardizing and retarding investment.
At least, that is part of the thesis argued by Johns Hopkins’s Roger Stern. In his recent paper, “Oil market power and United States national security,” he examines the cost of getting oil to market from the Gulf. Saudi Arabia, for example, claims that its costs to deliver one barrel of oil are about $1.50. Using a market price of $67/barrel, he estimates that the payback period for developing several new fields in the area could vary between 45 and 205 days. Or if market price was the low, low price of $10/barrel, the payback period would still be between 300 and 1400 days. He states:
OPEC coheres to restrict such opportunities. Absent cartel cooperation, investment would rush to such Gulf fields, production would rise, [market price] would decline, and market power would evaporate. The chasm that separates capacity cost from investment returns suggests that the cartel exerts market power by investment restraint.
Before that:
Much of Iraq has not been explored at all (29). Similarly, of 80 Saudi reservoirs, only 23 are in production (30).
Even beyond the low prices given for Saudi Arabia, Kuwait, and Iraq, estimates from ExxonMobil suggest a more rational price floor is about $10/barrel for other OPEC states and even in the Gulf of Mexico.
Have we really run out of “cheap oil?” Not according to these numbers. In my mind, President Bush’s SOTUA should spur investment in the Middle East. The less they invest, and the higher prices go, the more likely it becomes that we will replace them in the market with something else. As alternatives of any type to OPEC oil come to market, OPEC will be the only entity to cut supply in attempts to keep prices up. And that will only hurt them.
Agent Orange Says:
I will send you chapter 3 of Richard Heinberg’s latest unpublished book. He proposes a transparent and economically sound process of dealing with oil depletion while switching to a diversified (if not more sane) business model. If you have the time, of course. I don’t, right now.
George (Canada)