Wednesday, May 28, 2008

Congress Blames the Hedge Funds, Part II: Indonesia to OPEC...'See ya!'

Indonesia to Pull Out of OPEC
May 28, 2008 6:41 a.m.

JAKARTA, Indonesia -- Reduced to the status of a marginal net oil exporter, Indonesia will quit the Organization of the Petroleum Exporting Countries at the end of this year, Energy Minister Purnomo Yusgiantoro said Wednesday.

Asia's only OPEC member, Indonesia still exports natural gas, but its aging oil fields and lack of fresh investment in exploration have undermined the country as a crude producer and forced it to slash costly domestic fuel subsidies as global oil prices soar.

"Today we decided that we are pulling out from OPEC," Mr. Purnomo said. "We are an (oil) consuming country."

—The Wall Street Journal


What does the Koninklijke Nederlandsche Maatschappij tot Exploitatie van Petroleum-bronnen in NederlandschIndiƫ have to do with the Shell Transport and Trading Company?

Both companies discovered oil in colonial Indonesia way back in the 1800s. They merged in 1907, and today you know them as Royal Dutch/Shell.

Back in the day, Indonesia was a pretty big deal when it came to world oil supply, thanks to those early oil discoveries by the Dutch and the Brits and the fact that Indonesian crude was what is known as “light and sweet,” meaning low in sulfur and easy to refine into gasoline.

Indonesia joined OPEC in 1962, two years after the Organization of Oil Exporting Countries was formed to maximize the long-term value oil for the countries that are fortunate enough to export the stuff in large quantities.

It is dropping out in 2008.

That's right: Indonesia no longer exports oil, a fact we have highlighted here in NotMakingThisUp as far back as August, 2005 [See "Instability Adds Up," August 25, 2005].

For the record, Indonesian oil production peaked in 1977 at 1.7 million barrels day, most of which was exported. The absence of 1.5 million barrels a day of light, sweet crude, much of which ended up in American cars, is the equivalent of shutting down Prudhoe Bay.

And that is a fact the geniuses in Congress might want to consider before they waste a lot more time than they usually waste—holding hearings on Roger Clemens, for example—pursuing a witch-hunt against hedge funds and commodities traders.

But, of course, since it won't help them get re-elected, they probably won’t.

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.


Kyle S said...

Hi Jeff,

Did you see the news about Mexico? Look at this Reuters UK article about Mexican production in April. Output from Cantarell, Mexico's biggest field, is falling through the floor. That, coupled with rising domestic consumption, means Mexico might go from the second largest source of US imported oil in 2006 to a net importer as soon as five years from now.

Jeff D said...

More clearly than that this shows the idiocy of most state-run oil companies (PetroBras being the lone exception that comes to mind.)

They pad the payroll with fluff and spend no money on either exploring for more fields or developing technology to increase the yield in their current fields.

Mexico is in the same boat, and a good portion of their federal budget is derived from Pemex.

mxq said...

Via Yves Smith's blog:

"Global Oil Production 2007 is 85.6million barrels per day... times 365 = 31.244 Billion per year. While annual Brent Crude trade volume is worth roughly 57 billion bbs"

As the blog points out, Brent is only one type of crude traded...yet its annual volume is double what is produced in the physical world, so I hope everyone gets where this is going.

Instead of paper hoarding, it would be great if that capital was allocated to become productive...i.e. invest in the procurement of oil fields, land, alternatives, etc.

Tying this money up is a total waste of capital.

Of course, on the contrary, high prices have spurred E&P etc...but at what cost?

China, India, consumers are bleeding from their ears. In addition, there is a dilemma between investing in alternatives vs. investing in traditional...that's b/c they're still clearly both viable on a physical level, yet the paper level they are not.

Physical markets take forever to adjust...not only b/c they are capital intensive, but also b/c demand is highly inelastic...meaning consumers take time to adjust, too.

However, paper markets adjust in an instant, therefore inflicting maximum pain, given physical and paper market's eggregious intertemporal adjustments.

That's why crude markets need to be regulated. There are massive unintended consequences at work here.

Now, that is not to say, there won't be unintended consequences the other way, but as the world runs out of oil, XOM and other real "commercials" should bid the prices back up based on their appropriate time frames. Gradually allowing consumers and producers to respond.

Richard Wilson said...

Amen. Hedge funds are blamed for increases in sugar, gold, cocoa, oil, is anything not the fault of hedge fund managers?

Christopher said...

I have a problem understanding the bit about how Indonesia has been OPEC's only "Asian" member. Huh? What's the definition of "Asia" that excludes, say, the UAE or Saudi Arabia?

mxq said...

I have no idea which party is driving up futures prices. The CFTC doesn't bother to actively delineate between "commercial" and "non-commercial" interests in a coherent manner anymore.

I also have no idea how long-term aggregate supply/demand reacts to oil prices at $80, $90, $110, $120, $130. Does anybody know the difference? Nobody does...simply because those prices never got a chance to have any effect on behavior!

How could this be "price discovery" if producers and consumers have absolutely no time to shift their allocation and consumption (respectively)preferences at the prevailing price points?

Isn't that the whole point of futures markets?

Not any more, apparently.

Anonymous said...

Jeff: I think this post is quite illuminating, both on Shell and, to a lesser degree, on Indonesia.

Shell, as your readers may know, is an international oil company whose strategy is to "...focus on the faster-growing markets of Asia Pacific," of which Indonesia is a part.

Since Indonesia recently came out and declared itself an "oil consuming country", Shell will need to "pour on the capital" to find and develop significant reserves from oil sands for example and meet the energy demands of Asian-Pacific countries like Indonesia.

The problem, however, as Shell neatly describes in its Scenarios report, which I've included a link to here, examines the possibility of oil consuming countries "scambling" for oil supplies, where contries like Indonesia will need to act quickly and find supplies of oil from non-OPEC countries (hello, Norway) to meet its growing demand.

Shell has recently taken steps to improve its oil reserves faster than depletion, which bodes well in the near term for Shell's consumers. (I am not making this up - readers can see for themselves by visiting Shell's website and search for the March 2008 Strategy Update).

Long term, however, I wonder what will happen when consuming oil countries like Indonesia and, I might add, the US, find that unilateral deals between oil consuming countries and the energy producers who supply them, drive the price of oil to such a magnitude that energy policies are finally developed which focus on demand rather than supply?

Another great post Jeff!

dherback said...

Have you heard of EMEA? E-Europe, ME - Middle East, A-Asia. That's how Indonesia is the lone Asian rep.