March 4, 2008 - Speculation on crude oil futures is rooted in the belief that crude oil resources are diminishing. Investors are so drawn to this story that futures contracts for just 5 years out are selling at a premium, well above today's prices.
OPEC representatives recently noted that demand for oil is actually declining and world inventories are full, making it appropriate to slow down production. But they are hesitant to do so because lower production rates will be used as an excuse by speculators as proof that we are running out of oil, and reason to push prices higher.
The most obvious way to turn the tide on current price run-up and to stabilize prices relative to real supply and demand fundamentals is to reveal the amount of oil known to exist that can reasonably be produced at $100/bbl. All reservoir engineers in the industry know the figures, because that is what they do -- estimate reserves based on current market prices. But things got weird a couple of years ago -- prices began escalating so fast, that no one would dare revise reservoir estimates based on those inflated prices -- the numbers just get too huge. Companies just quit adjusting the estimates in their annual reports (well, BP did report the viability of the Canadian Tar Sands).
To avoid a total melt down in the futures markets, maybe the engineers should add some qualifying factors, or provide the estimates at $60 per barrel instead of $100 per barrel - to temper the truth.
Anyway, oil producers should collectively answer the question: how much oil can be produced from known resources worldwide at $60 per barrel? If the futures market accurately mimics real market supply and demand for oil, such information should cause prices to go lower.
If futures prices continue to rise after traders see how much oil there is and how long it will last, then someone needs to take a good look at how the futures market for oil is designed and fix it.
Just some thoughts to consider ----------------- George
I was wondering whether the oil companies might be worried about revising their reserves upward because of an equilibrium problem.
Basically, as the oil price goes up, so does the cost of the inputs to their business. So the price at which a particular reserve can be profitably exploited is not completely independent of the oil price itself?
Posted by: Jeremy | March 28, 2008 at 05:50 PM
You are correct about the concern, but I don't believe that is sufficient reason not to disclose the reserves estimates.
Posted by: George | March 28, 2008 at 06:00 PM