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Cutbacks Continue

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The news has been full of headlines recently of major OPEC nations announcing cutbacks. Saudi Arabia, Kuwait, Iran, UAE, Venezuela, even Nigeria where rarely a month goes by that some oil company has to cry force majeure on deliveries due to violence, they are all waving their hands, jumping up and down, and screaming, "hey, look over here!" as they desperately try to convince the world that this time they are going to abide by their OPEC-instructed quotas. The 57% drop in oil prices from the $147 a barrel July 2008 high has been extremely painful. They will do anything at this point to stop the slide in prices.

Another area that could be hit hard by the drop in crude oil is the oil-sands project in Canada. A recent news article quoted the CEO of Jacobs Engineering Group Inc. (NYSE: JEC), a major engineering company around the globe with significant contracts in the oil-sands project, who said that the decline in oil prices was having a big impact on business. Companies involved with extracting crude oil from the Canadian oil sands have re-evaluated the scope and speed of their projects and many are choosing to scale back or delay projects. Some estimates are forecasting a 33% drop in work planned for the region.

Saudi Arabia has continued to build out their infrastructure and oil production ability in spite of the drop in oil prices. The state-run company, Aramco said that plans to boost capacity to 12 million barrels per day (mpbd) should be complete by the end of 2009. Two new oil fields, the Shaybah and Nuayyim, will come online in 2009 and the massive 1.2 mbpd Khurais project will also be completed in 2009. Saudi's current output is about 9.5 mbpd due to the recently announced production cutbacks.

There was also some good news out of Brazil. The last few years have been great for Brazil, which has discovered the Guara, Iara, and Tupi deep-water oil fields off the country's coast. It takes years to get deep-water fields online and Brazil believes that full-time commercial production of 100,000 barrels a day could be available by very late 2010. This could ramp up to 300,000 bpd by the end of 2012. This oil could be worth its weight in gold since 300,000 bpd will not keep up with the global demand increase of 1.5% a year and it won't even make a dent in the 4% to 5% depletion rate for current oil fields around the world.

Election night in the U.S. brought more than a changing of the guard. There were plenty of ballot initiatives brought before the people. Voters in California approved a $10 billion down payment on a major infrastructure project to develop a high-speed train system. This is not your grandfather's railroad but an 800-mile long, 200 MPH bullet train. Considering our future of peak oil this is a great initiative. Too bad it didn't happen two or three elections ago. The entire project is expected to cost $45 billion and could take 20 years to complete with the first trains up and running in about six years.

Early Thursday morning crude oil continued Wednesday's slide as oil futures were down about 83 cents to $64.47 a barrel. Asian markets were also lower after the 5% sell-off in the U.S. on Wednesday. The Japanese NIKKEI was off more than 6.5% and the Hong Kong Hang Seng was down more than 7% with both indices reversing the previous day's gains. This doesn't bode well for Thursday's open here in the United States.

Jim Brown OptionInvestor.com

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