Why have oil prices gone up, and how is jet fuel affected?

Date added: 20 March, 2012

IATA expects the price of oil to rise this year. The price of jet fuel is about $139 per barrel at present, and has been around $124 to $140 over the past 12 months. There is speculation about what is causing the current increase in the price of oil, and to what extent this is caused by difficulty in pumping much more crude oil. Partly due to the recession since 2008 the amount of oil pumped worldwide has not risen much over the past 5 years, with slight fluctuations. Even the International Energy Agency said last year that production of conventional crude oil will decline slightly to “around 68 mb/d by 2035. To compensate for declining crude oil production at existing fields, 47 mb/d of gross capacity additions are required, twice the current total oil production of all OPEC countries in the Middle East.”

Why Have Oil Prices Shot Up?

http://goldnews.bullionvault.com/oil-prices-031920128

19.3.2012

This is a long article, but below are a few extracts:

….

Let’s recall that nearly 60% of global oil supply comes from outside of OPEC from countries like the US, Canada, Brazil, Mexico, China, Australia, and the big producer—Russia. There is no spare capacity in this non-OPEC grouping and there hasn’t been for years. Sure, there is oil to be developed in non-OPEC countries; but that is not production capacity (meaning it is not supply that can be brought online quickly).

….

Moreover, the failure of non-OPEC production to increase within last decade counts as a true surprise to the global oil market. The faith in non-OPEC supply over the last decade helped to keep prices subdued, until that faith was shattered by 2007′s wild spike.

The problem now is that the oil market has been re-educated. Faith in the non-OPEC countries’ ability to increase supply is no more. Meanwhile, the great deceleration in Russian oil supply growth, has spooked the market. Combined, a market with 74 mbpd of production and a theoretical spare capacity of 3 mbpd simply creates too much uncertainty.

And consider this: the amount of total spare capacity is now equal to the 3 mbpd of demand that’s been taken offline in Europe, Japan, and the United States over the past 7 years, as oil prices have risen from $40 to the $100 level. Thus the oil market has quite correctly rationed supply, at higher prices. If prices were to fall to $50 or $60, the world’s lost demand could be rebuilt rather quickly.

Killing discretionary demand is now the proper function of the oil market in an age of flat supply growth.

….
We can therefore say that in our post-credit bubble collapse era, and with global oil supply now flat, that quantitative easing Granger causes higher oil prices. It keeps economies from collapsing (for now) and thus brings demand up against very tight supply. As we can see from the chart above, the USD Index has for three years now been bouncing off the bottom it first reached in 2008. In a way, this is helpful because it brings to light the new dominant factor in global oil prices: supply.

….

Supply, and the recognition of supply, are now the dominant factor in the oil price. A point so obvious, it hardly seems worth making. However, the developed world is still largely operating on the classical economic view that higher prices will make new oil resources available.

That is true. But, it’s just not true in the way most anticipate.

While higher prices have brought on new supply, these resources have been slow to develop, are more difficult to extract, and generally flow at lower rates of production. As the older oil fields of the world decline, the price of oil must reflect the economics of this new tranche of oil resources. There are no vast, new supplies of oil that will come online in 2013, 2014, and 2015 at the scale to negate existing global declines.

During the entire time that global oil supply has been held at a ceiling of 74 mbpd, since 2005, a lot of new production in the Americas and Africa especially has come online. But it has not [been] enough to increase total world supply. And the price of oil has finally started to price in that new reality.

……

Confirmation of the flat level of oil production in tables at http://www.eia.gov/ipm/supply.html

World oil supply (Thousand Barrels per day)
	United	Persian
	States	Gulf	OAPEC	OPEC	World	IEA figure
2000 Average	9,058	21,520	22,128	31,195	77,768	77,762
2001 Average	8,957	20,905	21,426	30,592	77,686	77,684
2002 Average	9,000	19,680	20,455	28,925	76,994	76,989
2003 Average	8,797	21,134	22,006	30,632	79,598	79,601
2004 Average	8,700	22,997	23,711	33,265	83,105	83,105
2005 Average	8,322	23,899	24,730	34,955	84,595	84,579
2006 Average	8,331	23,623	24,714	34,723	84,661	84,543
2007 Average	8,457	23,105	24,363	34,374	84,543	84,441
2008 Average	8,514	24,375	25,457	35,708	85,507
2009 Average	9,141	22,889	23,797	33,872	84,389
http://www.eia.gov/emeu/ipsr/t44.xls
US Energy Information Administration

http://www.eia.gov/emeu/ipsr/t44.xls

from
http://www.worldenergyoutlook.org/docs/weo2011/executive_summary.pdf
WORLD ENERGY OUTLOOK
EXECUTIVE SUMMARY

by the International Energy Agency

Page 3

The cost of bringing oil to market rises as oil companies are forced to turn to more
difficult and costly sources to replace lost capacity and meet rising demand. P – the largest single component of oil supply – remains at current levels before declining slightly to around 68 mb/d by 2035. To compensate for declining crude oil production at existing fields, 47 mb/d of gross capacity additions are required, twice the current total oil production of all OPEC countries in the Middle East. A growing share of output comes from natural gas liquids (over 18 mb/d in 2035) and unconventional sources (10 mb/d). The largest increase in oil production comes from Iraq, followed by Saudi Arabia, Brazil, Kazakhstan and Canada. Biofuels supply triples to the equivalent of more than 4 mb/d, bolstered by $1.4 trillion in subsidies over the projection period.