It seems the liberal democrats are pointing the drop in recent weeks on gasoline to this being an election year. You guessed it they are blaming the President for the current drop in the price of gasoline. Setting themselves up for another disappointment and excuse for losing in November. Here is an article I found on forbes.com about the truth of why the price has been dropping and why it may drop more.
Really, Really Cheap Oil Christopher Helman, 10.02.06
Gasoline for $2? Michael Lynch says those good old days are just around the corner.Don't sell that SUV just yet. Oil, at a recent $66.50 a barrel, will fall to $45 by mid-2007 and could dip briefly into the 20s in 2008. Sometime next year you are going to see a $1.95 price on a gas pump. So says Michael C. Lynch, 51, president of Strategic Energy & Economic Research in Amherst, Mass. He swears he hasn't been inhaling fumes. His reasoning: New supply, coming online from all corners of the world, is more than ample to satisfy growth in demand and sufficient even to withstand an embargo against Iran, which produces 3.75 million barrels of oil a day. Lynch argues that the threat of disruptions--nuclear brinkmanship, war, terrorism, hurricanes, pipeline corrosion--has larded oil prices with a $20-a-barrel risk premium. As these perils recede, oil prices will fall. A refreshing but distinctly minority view. Over the last two years, as prices have soared, proponents of the Peak Oil theory--which argues that we will soon pass the point of being able to replace reserves as fast as they are consumed--have resurfaced in force. Of course, folks have been predicting the end for 50 years. In fact, there's still plenty of fuel to be sucked out. Consider that over the past 100 years the U.S. has drilled 3.5 million wells into most of its oil basins yet still produces 5 million barrels a day. In the Middle East only 50,000 wells have been drilled into far more prolific basins, yielding 15 million bpd. While the world has consumed maybe 1 trillion barrels of oil in the last century, there are at least 1 trillion barrels waiting to be exploited, reports the U.S. Geological Survey. Add to that an estimated 1 trillion barrels of oil sands resources and another 2.8 trillion barrels of oil shale, and we can all afford to put down our "End Is Nigh" placards. "The oil price spike was caused by geopolitical issues that can be fixed or overcome," says Lynch. The real issue is geology. Recent discoveries--and the prospect of new ones--sketch a bright future. One of the industry's most enduring optimists, Lynch spent 20 years working on energy policy at the Massachusetts Institute of Technology's Center for International Studies, his alma mater. Four years ago he opened his own shop to advise oil companies, governments and investment banks. While a student at MIT during the Cold War, he studied national defense. He became frustrated because "no matter how much we knew about the Soviets, we would never be able to fully predict whether a madman might launch a nuclear first strike. Psychology is not inherently knowable," he says. "Geology is." His abiding faith in technology's ability to wring oil from the most tucked-away places have put him on the outer margins of conventional thinking. He says, "I've been a gadfly since I started." A gutsy one, too. In 1981, while living in Boston, Lynch got into a 3 a.m. tangle with two burglars in his apartment. Stabbed in the chest, knocked unconscious with a bottle of triple sec from his liquor cabinet, Lynch woke to find one of the culprits still on the scene. So he grabbed a sword he kept behind his bedroom door and--still wrapped in his plaid bathrobe--whacked the guy. In the hospital, he identified the assailant by the tattoos on his arms. The incident triggered a mild form of posttraumatic stress that he keeps in check with low doses of antidepressants. The pills, he insists, do not affect his outlook on the long-term health of the world oil supply. The recent doubling of prices, Lynch argues, was set in motion four years ago; the 2002 strike by Venezuelan oil workers has kept 1 million or so barrels per day off that country's output of 3.25 million bpd. The subsequent application of socialist economics to the Venezuelan fields has done little to bring that volume back. The trouble in Venezuela was followed by the U.S. invasion of Iraq, resulting in another 1 million bpd reduction to an average 2 million. In 2004 China sent out petroripples by pushing up its consumption by nearly 1 million bpd to 7.4 million. Add in the unrest in Nigeria, which knocked another 500,000 bpd off-line, and the world suddenly had 4% less oil than it expected. By mid-2005 every producer except Saudi Arabia was pumping flat out. The Saudis had 1.5 million bpd of spare production capacity--oil spigots on standby--and it was less desirable heavy crude. The spot markets reflected the unease as traders braced for the next disaster. They got it in hurricanes Katrina and Rita, which knocked 700,000 bpd or so off-line. Still, says Lynch, "These were all one-time transient events that can be fixed or adjusted to." There's reassuring evidence of adjustment from both supply and demand. Consider supply. Since 2003, industry spending on exploration and production has exploded from $169 billion to $277 billion last year, according to consultancy John S. Herold. Rental rates for some drilling rigs have quadrupled to more than $300,000 a day. New oil is coming from almost everywhere, a mix of big and small, OPEC and non-OPEC. In the U.K.'s North Sea fields, for example, Apache (nyse:
APA -
news -
people ) Energy is using new recovery techniques to revive production in a basin thought to be in terminal decline. Oil from a 1-million-bpd field in Azerbaijan recently hit the world markets, flowing through the new $10 billion Baku-to-Ceyhan pipeline. In Angola offshore fields could start pumping 500,000 bpd next year, and deepwater fields off Brazil will add hundreds of thousands more, as will onshore fields in Algeria. On the horizon: In the Gulf of Mexico, Chevron (nyse:
CVX -
news -
people ), Devon Energy (nyse:
DVN -
news -
people ) and Statoil recently discovered fields in an area thought to hold from 3 billion to 15 billion barrels (equivalent) of oil and gas reserves. Lynch calculates that global production capacity will expand by a net 2 million bpd this year and 3 million bpd in 2007. On the demand side, growth has moderated worldwide. Lynch expects growth to increase less than 1 million bpd this year and 1.4 million bpd in 2007. What accounts for the dip? High oil prices and a slowdown in some industrialized economies. Both European and U.S. demand will be flat this year. The rate of growth will slow even in China: 500,000 bpd this year, compared with 900,000 bpd of growth in 2004. All this will give producers time to catch up. Lynch points out that global oil production held on standby has climbed to 2.7 million bpd now. The Saudis account for 2 million of that; Kuwait and Abu Dhabi the rest. Lynch sees the cushion climbing to 4.5 million bpd in 2007 as the Saudis bring the Khursaniya field into service but cut back elsewhere to make a place in the market for non-OPEC growth. If elections in Nigeria next April ease political tensions between groups in the Niger River delta, 500,000 bpd more could hit the market almost immediately. To make room on the market for Nigeria's high-quality crude, other OPEC nations would likely cut back, pushing the cushion up to 5 million bpd. That capacity should cover a supply disruption from virtually anywhere in the world, helping to push down the price of oil, Lynch believes, to $45 a barrel by the second quarter of 2007. What about the contango effect (when the price of a barrel of oil for delivery in six months is higher than an identical barrel bought on the spot market today)? Contango pricing encourages hoarding: Why sell your barrel of oil at today's spot price of $66.50 when you can make $2 more by promising to deliver it in six months, more than enough to cover the cost of storing it? The result is that oil inventories in the developed world--2.7 billion barrels--are now at their highest levels since 1999, enough to offset 12 months of, say, blocked Iranian exports. But, as Lynch points out, oil futures don't usually trade in contango. Producers need to reduce their financial risks. They do so by being sellers in the futures market, depressing futures prices. Lynch thinks that it won't take long for savvy oil traders to notice the gradual building of the capacity cushion and to decide that there is no real threat of supply disruption. When speculators start unwinding their oil futures positions, the rush for the exits will begin, pushing down oil prices. Even Saudi Arabia, once the world's leading producer, may not be able to halt the price slide. The kingdom has for years taken it upon itself to hold most of the world's spare production capacity. In April Saudi Aramco cut its output by 350,000 bpd to 9.1 million bpd because there wasn't enough demand for the oil. As new production comes online from OPEC and non-OPEC nations alike, the Saudis will likely need to trim back again, to 8.5 million.
