For oil consumers, and that means everyone on the planet, this is grim news.
For oil producers, and a handful of very rich investors, this is more good news because rising demand and stagnant supply means just one thing: higher prices and fatter profits.
But before investors break out the bubbly, there is another likely reaction to the increasing gap between supply and demand – more heavy criticism of the petroleum industry, and more talk of windfall taxes.
Two events last week triggered these latest thoughts from The Slug on petroleum supply and demand. First came the latest global demand forecasts from the International Energy Agency. Second came a calculation by Canada’s Calgary Herald newspaper on what “Big Oil” did with its profits in the first half of 2007.
Profits first. According to the numbers compiled in Canada, the world’s top four oil companies, ExxonMobil, Chevron, BP and Shell, booked combined profits of $US57.5 billion in the six months to June 30.
Nothing wrong with that, you might say.
Oil prices are high, and profits are needed to expand the industry, especially if production is to reach that demand target of 88.2 million barrels a day published by the IEA on Friday.
But the next part of the profit calculation is what will land Big Oil in deep water. Of that $US57.5 billion in profit an estimated 40%, or $US22.9 billion, was spent by the top four buying back their own shares.
To a casual observer such as The Slug, this is a truly delicious situation which can have only one of two possible outcomes.
The funniest is that if big oil companies do buy their own shares at the current rate (and ExxonMobil has been buying back shares for 28 consecutive quarters – seven years) then they must, technically, at some stage, disappear.
When the last share is bought, presumably for a few trillion dollars, big oil ceases to exist in the form in which we have known it.
That won’t happen, obviously. But the point being made is valid. Share buy backs are good news for shareholders, and they are the people management is supposed to think about first.
There is, however, a limit to how far a buyback can go, and while there is no danger of a big oil company simply disappearing up its own buyback there is every chance of a government (or three) asking ‘What’s the game – and have you forgotten how to play it?’
The game, from a government perspective, is contained in the combination of the share trading news and the IEA news because rising demand, and rising buyback, must mean less money being spent on exploration – and therefore, further cuts to future supply from the private sector and more power in the hands of national oil companies in Russia, Iran other unfriendly places.
According to IEA’s Friday report, global demand for oil this year is expected to grow by 1.8% to 86 million barrels a day, and then up by another 2.5% in 2008, reaching the forecast 88.2 million barrels a day.
That forward-looking estimate prompted the IEA to ask the Organisation of Petroleum Exporting Countries (OPEC) to boost production ahead of the northern winter – and quickly, to avoid a supply crisis in January.
The Slug is not holding his breath that OPEC will do as requested. But he is looking forward to a furious debate in Europe and the US about what oil companies are doing with their spare loot because buybacks can only go so far before government steps in – and no-one wants that.
