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The Headline that Did Not Happen and the One that Did

In a world of no excess capacity in oil production and with a true equilibrium between supply and demand, headlines have had the day. Volatility should be expected in a margin business where one half of one percent of over or under supply, real or speculated, has caused even in more “normal” times a $5 to $10 swing in the price. Witness the oil price collapse of 1999 because of the Asian flu or the persistent $70 plus prices because of the ongoing Middle East wars.
But in just a couple of recent weeks, a headline that did not happen and a headline that did pushed the price of crude oil down from a high of over $75 to $60, a 20 percent reduction and a five-month low.
The United Nations deadline for Iran to comply with the resolution to stop nuclear enrichment passed with barely a whimper from the United States, Britain and France. The threat of a military option was noticeably absent perhaps because of Iraq fatigue and an almost certain lack of cooperation by Russia and China, permanent Security Council members with veto power. This is the headline that did not happen and it was heard around the oil trading world. The results were quick.
A headline that did happen was the huge discovery in the Gulf of Mexico by an oil company group headed by Chevron, Devon and Statoil. True to form good news, especially in the oil business gets less press space than bad news but it is certain that the find will have a huge real impact on both US reserves and, even more important, on US oil production. At full development, perhaps four years from now, the type of geologic formation, the flow characteristics of the crude oil and the reservoir pressure will reverse a trend of US production decline for years to come. It is my estimation that the find and associated structures could lead to as much as three million barrels per day of incremental production. Initial per well production may reach tens of thousands of barrels per day, only limited by the size of currently feasible well completion tubulars and technologies. .
We have often said that headlines control a huge part of the traded oil price, perhaps as much as $35 over what we have calculated as the equilibrium price of oil, around $40. This is the level at which oil should be traded, if the international petroleum business was run as a commercial, profit-making and re-investing enterprise. It has not been that and it will not be that any time soon.
Geopolitical, corrupt and populist regimes and the fear factor have held sway for essentially five years. In the last three year we were just one large headline away from $100 oil: an Israeli pre-emptive attack on Iran, a devastating terrorist act on Saudi oil facilities, a big radical move by Venezuela’s Chavez. Anything can still happen and if it does, the effect will be immediate..
But things can go the other way, as the recent events have shown. The Gulf of Mexico discovery, after it sinks in further in the public discourse, will have a a much bigger and cascading, price-soothing effect, mujch earlier than actual production. .It will soften the bite of energy militant regimes and, although the cost of production from reservoirs beneath seven thousand feet of water and 25,000 feet of total depth is not cheap. It can be done well with $40. The certainty of supply near the biggest market in the world will have price stabilizing effects. Also, at times silly rhetoric about peak oil will experience the same fate as previous instances of similar talk, spanning the entire history of the business. Finally, deep offshore oil elsewhere in California and Florida is almost certain to open up. It would be a hard argument to keep such a veritable treasure locked up for a country that has almost exclusively the technology to find it and produce it. I would think the luxury afforded by NIMBY environmental attitudes will be less preferable to another oil war.
Michael Economides is the editor in chief of The Energy Tribune.