Here is a new piece from Mat Simmons who is one of the few analysts who has gotten this thing right over the past ten years or so. Follow the link. It's worth reading the whole thing.
WorldOil.com - Online Magazine Article: Special Focus - Feb-2005: "If any spare wellhead capacity still exists, it is for crude that is both heavy and sour. The refineries that are equipped to refine this type of crude are currently operating at 100% capacity. Compounding this problem is the fact that the world's light sweet crude supply is also in decline. Almost 90% of new oil projects produce oil that is either sour, heavy, or both.
The world's network of crude oil pipelines also is now operating at virtually 100% capacity. For most of 2004, the world's tanker system operated at full capacity, too. This sparked an unprecedented rise in tanker rates, which added up to $5 to $6 per barrel to the wellhead price of oil in some key long-haul export routes.
The fleet of high-quality drilling rigs is now close to 100% utilized, even though utilization remains soft in drilling markets like the Gulf of Mexico, Venezuela and the North Sea. A high percentage of the offshore drilling fleet is approaching an age that used to signal obsolescence, yet the global capacity to replace even 10% to 15% of the existing fleet over the next five years is almost non-existent. Many of these capacity bottlenecks can be corrected over time, assuming sufficient investment is made. The industry must begin replacing the aging rig fleet, but fleet expansion is also required to drill more wells and fight the growing decline curve.
A lack of qualified manpower is looming high on the list of capacity problems. In addition to the many layoffs and downsizing events that our industry has endured, we've only been hiring a handful of entry level employees each year. As a consequence, we now have an aging workforce at a time when the technical intensity of the industry is increasing each year. This manpower issue is an industry-wide problem and there is little evidence that anyone is creating a plan for resolving the problem.
Meanwhile, oil and gas price volatility grows as the industry operates entirely on a spot market mentality. These increasingly high price swings are eroding price signals as normal guidance for how industry participants should behave.
Oil inventories have also moved so close to 'just-in-time' supplies that any sudden interruption can send prices spiraling upward. In the fall of 2004, Hurricane Ivan crossed the Gulf of Mexico with enough power to destroy much of the production infrastructure, but in the end delivered only a glancing blow. However, the small amount of damage incurred by Ivan still required several Gulf Coast refineries to borrow oil from the US Strategic Petroleum Reserve to remain operational.
Whenever a rise in oil inventories occurs (as it needs to do if demand continues to grow), it is usually viewed by oil traders and analysts as a sign of pending supply glut rather than welcomed as a calming influence in an extremely tight oil market. Just-in-time supply in the oil business is a dangerous energy form of Russian roulette.
None of these trends are easy to stop. Few of these trends also reflect signs of a healthy, sustainable and prosperous industry. How all this plays out throughout 2005 will be interesting to observe. If oil demand enjoys a growth year similar to 2004, it is hard to see how supply can keep pace.
There is a chance that extremely mild weather could depress winter demand. Summer weather could become so mild that it hampers air-conditioning usage. The global economies could also weaken so much that oil demand is flat. China could experience a hard landing or endure social chaos. The Asian tsunami could unravel Southeast Asia's economic growth. A surprise outbreak like SARS or the Asian flu could stall further oil demand.
Any of these scenarios are possible, but unless they occur it is hard to see how supply will outstrip demand in 2005. "