Summer of high prices, even after BP begins collecting oil?

A summer of high oil prices?

The Lower Marine Riser Package is supposedly collecting and siphoning around 15,000 to 20,000 barrels of spewing oil from the Macondo well in the Gulf of Mexico which is good news indeed. The bad news of course, is that this isn't even accounting for half the gushing oil, which means that there is still 20,000 to 30,000 barrels of oil finding its way into the sea, which deems the optimistic estimates by BP and the US Coast Guard of 5,000 to 10,000 barrels a day just that - optimistic.

Couple this with the US Energy Information Administration (EIA), who reported that oil and gasoline stocks saw a decline last week - the data from the EIA saw an unexpected drop of 2.6 million barrels of gasoline as well as 1.9 million barrels of crude, despite a rise in demand of 20 million barrels a day - plus the fact that the US is rolling into the summer driving season, and it may not be unreasonable to expect the oil price to continually hover above $74.

Obama's drilling moratorium, originally slated at six months, will likely be extended. As a knock-on effect, the Minerals Management Service (MMS), the regulators of offshore permits are now looking into shallower water wells, which would reduce the number of barrels a day to around 350,000 for the next five years. This would put further pressure on demand, as offshore deepwater drilling in the Gulf of Mexico accounts for 24 percent of all America's oil usage.

Longer moratorium will mean drilling in shallow water

Any moratorium also puts US oil jobs on the line, and according to John Houghtaling, CEO of Ocean Therapy Solutions, "Half of the workers in the Gulf work in oil production. These 33 deep water rigs are now going to pull anchor, and they're going to go to Brazil and Africa (and we've already gotten reports). So [the moratorium] is a major problem."

The likely reduction in US oil production would mean enhancing imports, estimated to grow by around 20,000 barrels a day, something that would keep oil prices inflated. Globally, exports from Ecuador rose 7.6 percent in April. Iraq's production is running at 2.45 million barrels a day, 1.9 million barrels of which are exported. China has increased exports with 17.29 million tons of crude reaching Chinese shores in May. This is up more than 12 percent from last year.

The Mexican state energy company Pemex expects to increase production to 2.7 million barrels a day up to 2012 and 3.3 million barrels a day by 2024.

BP's shares are down 34 percent since the crisis began, and could be burdened further after the Obama administration sent a $69 million invoice to BP this week, to begin to recoup some of the cleanup costs. BP is also facing a potential criminal investigation which some commentators have suggested could potentially send BP crashing towards Chapter 11. After BP's shares dropped, the market cap has shrunk by an estimated £42 billion.

Despite short-term problems, long-term prospects remain healthy. The uncertainty looming in the US will likely mean oil production may be tight over the summer months, maintaining strength in the oil price.

Oil spill latest: A nuke to stop the Gulf oil spill | Oil spill latest: The cost of clumsiness | Gulf oil spill latest: Containing the spill | Oil spill latest: BP still the company to clean up mess

Like this article? Get the RSS feed: