World Oil Production Declined in May

According to the International Energy Agency, world oil production declined in May by 200,000 barrels per day from its original April estimate of 86.8 million barrels per day. The new level, 86.6 million barrels per day is 700,000 barrels per day lower than its original January estimate of 87.3 million barrels per day. Furthermore, the IEA noted numerous cases where OECD and world oil stocks had fallen from the previous year to a low and low-average range of supply.

Caveat
The IEA has made a backward revision of its supply data which serves to muddy world oil supply estimates. It revised its January - April 2008 estimates down by approximately 700,000 barrels per day. This revision puts the April estimate nearly 1.2 million barrels per day lower than its original December 2007 estimate but lifts the most recent May 2008 estimate by 490,000 barrels per day. So the conclusions change from slowly but gradually declining oil production since January to a rapid decline in oil production at the start of the year followed by a slight upswing in May that is still more than 700,000 barrels below production at the end of last year.

Supply fails to meet demand
Regardless of the new IEA numbers, world oil supply is now below world oil demand in the IEA estimate by 200,000 barrels per day. At this point, the IEA numbers begin to show some agreement with US Energy Information Agency numbers that have shown world oil supply failing to meet demand for the last 16 out of 18 months. According to the IEA, world oil stocks are currently drawing down at the rate of 200,000 barrels per day. With severe downturns in stocks throughout the OECD and world, it would seem that the IEA's estimates may be a little optimistic. Regardless, the IEA reported an OECD oil stocks draw of 8.1 million barrels during May -- "in sharp contrast to the typical build" this time of year.

OPEC supply grows by 400,000 barrels per day
One bright spot in the report noted a build in OPEC oil supply of 400,000 barrels per day on the back of a 300,000 barrel Saudi increase, 95,000 barrels per day in new Nigerian oil and record oil production in Iraq. New OPEC production met declining production in many areas around the world including but not limited to Mexico, the US, Russia, and the North Sea. Of note is the fact that OPEC has fluctuated between 31 and 33 million barrels per day of supply since 2005 and is still struggling to make appreciable gains.

World oil demand slows
A second bright spot to the report shows world oil demand growth continuing to slow.The new estimate of 86.8 million barrels per day of worldwide average demand for 2008 is 80,000 barrels per day less than that of the previous month. Overall, demand growth predicted for 2008 is 800,000 barrels per day or 230,000 barrels per day less than in 2007.

Conclusion -- supply falling and demand growing in the face of shortages is a dangerous situation
With shortages springing up in more than 25 countries around the world, with supply falling and demand continuing to grow, the world faces a dangerous situation of severe and increasing supply and demand imbalance. This situation will further pressure prices to increase. Though regulation in Congress may help ease oil prices by as much as 15-25 dollars per barrel in the short run, the fundamental situation of oil production will rapidly eat away any price reduction until enough demand is destroyed to make up for demand increases in Asia and the Middle East and to match any forward supply decline.

Some have predicted that world oil prices are set to reach as high as $150 dollars in coming weeks and as high as $250 dollars by next year. Though such levels are possible, it seems that severe economic impact of sustained higher prices are causing knock-on effects that make any price prediction an exercise in reading tea leaves. That said, the world is entering an unprecendented time with regards to energy where rising costs will severely impact air travel, the automotive industry, all forms of shipping, energy generation and electricity production for those reliant on diesel generators, the food industry, the chemicals industry, and many raw materials to include plastics, textiles, and synthetic rubber. Food, travel, lifestyles, and, perhaps, lives themselves, will be severely impacted around the globe.

Though the problem is immediate, most of the truly valid solutions are long term. The sooner we begin putting those solutions in place, the sooner we will navigate the crisis.