Peak Oil

It is no surprise that the world’s largest oil company would report record secondquarter earnings of $11.68 billion, or $2.22 per share, but what is surprising is that production dropped 8% from the year-ago period, the largest decrease in at least a decade.

Even excluding the effects of Venezuelan expropriation, the Nigeria labour strike and lower entitlement, volumes would’ve resulted in a production drop of 3%.

This is a re-occurring theme among companies and countries that is under-reported by the media and is a major reason why we remain long-term bulls on oil prices.

“They are not growing,” said one analyst. “Production is becoming more and more of a concern. For these guys, access to reserves is a very big issue.” Exxon’s capital expenditures rose 38% while margins in its refining and chemical units fell. Analysts expected EPS of $2.46.

Anyone wanting to understand what's happening should peruse BP's excellent Annual Statistical Review of World Energy, published . It shows the "fundamental" problem - oil demand running ahead of supply. And that gap is far more likely to widen than to close.

In 2007, the review shows, global oil demand was 85.2m barrels a day, up from 84.2m the year before. Global production, meanwhile, fell from 81.7m barrels daily, to 81.5m. So, global oil use is accelerating just as production is coming down.

Such price-boosting trends will almost certainly continue. On the consumption side - as is well-know - the relentless demands of China, India, Indonesia and the other "emerging giants" are unlikely to abate soon. As these countries continue getting richer, their rapid population growth and escalating fuel use per head will keep global oil demand spiralling upward.

OK - the Western world, in the grip of a once-in-a-generation slowdown, is starting to use a bit less crude. General Motors has just closed four US truck plants as more consumers go for smaller vehicles, which are often made overseas. Some airlines are cutting back on less popular routes.

But, as the BP numbers make clear, these tiny changes are completely dwarfed by the massive demand generated by the fast-growing emerging markets.

Oil use in the EU and the US combined fell 1 per cent in 2007, as prices hit $100 and the credit crunch took hold. Meanwhile, emerging market crude demand - in Asia, Africa and the former Soviet Union - rose 4 per cent.

Ah yes, you may think, but the EU and the US are much bigger. So, their 1 per cent fall has more impact than the 4 per cent rise in those tin-pot developing economies. Really?

While the EU and US combined used 35.6m barrels a day in 2007, the emerging markets, between them drained 36.2m barrels - more than the Western world. That's never happened before. The fast-growing part of the planet is now using more oil than the slower-expanding "advanced" regions. And that trend, by definition, will continue.

The Bottom Line for Investors:

The long term trend for rising energy prices is in place. The long term supply not meeting demand is in place. In the words of T.Boone Pickens - the price of oil will continue to rise until it destroys demand and that is not at today's prices.

Global oil reserves are sufficient to meet current production for more than 41 years, BP said.

While the world has enough fossil fuel to support growing production, politics, barriers to entry and high taxes reduce the reserves accessible to firms such as BP, the company said.

"Declining oil production in the OECD highlights the fact that, while resources are not a constraint globally, the resources within reach of private investment by companies like BP are limited," said Hayward.

"When it comes to producing more oil, the problems are above ground, not below it. They are not geological, but political," he added.

Countries such as Venezuela and Russia are grabbing more cash and control from firms that work their oil and gas fields, a trend dubbed resource nationalism by some analysts.

At the same time, some of the world's largest reserves, such as those of Saudi Arabia, are off-limits to foreign investment. Sanctions, wars and violence have slowed progress in developing Iraq's oil industry.

BP's report also found growth in primary energy consumption had slowed in 2007 versus 2006, but at 2.4 percent it was still above the 10-year average for the fifth consecutive year.

Global oil consumption grew by 1.1 percent last year, slightly below the 10-year average.

Demand in the oil-exporting regions of the Middle East, South and Central America, and Africa accounted for two-thirds of world growth, BP said.

Global natural gas production rose by 2.4 percent to 2.94 trillion cubic metres (tcm) in 2007, BP said, while consumption grew by 3.1 percent to 2.92 tcm led by the United States.

Proven gas reserves stood at 177.4 tcm at the end of last year, an increase of 0.6 percent.

Coal consumption grew by 4.5 percent last year, making it the world's fastest-growing fuel for the fourth straight year. (To see the highlights of the report, click on [ID:nL11426893]) (Reporting by Jane Merriman, writing by Alex Lawler, editing by Barbara Lewis)

BP Oil Reports Global Oil Production Decline June 11,2008

LONDON, June 11 (Reuters) - World oil production fell by 0.2 percent in 2007, the first decline since 2002, and proven oil reserves were flat, BP Plc (BP.L: Quote, Profile, Research) said in an annual review released on Wednesday.

Production fell by 130,000 barrels per day (bpd) last year to 81.53 million bpd and reserves were essentially flat at 1.24 trillion barrels, London-based BP said in its 2008 Statistical Review of World Energy.

The figures compiled by BP underline the world's challenge of boosting production to meet growing demand. Oil prices have been rising since 2002 and last week hit a record $139.12 a barrel, partly because of supply concerns.

"The defining feature of global energy markets remains high and volatile prices, reflecting a tight balance of supply and demand," said Tony Hayward, BP's chief executive, at the launch of the review.

"This has put issues such as energy security and alternative energies at the forefront of the political agenda worldwide."

World production fell in part because of supply restraint by the Organization of the Petroleum Exporting Countries (OPEC), source of about two in every five barrels of oil.

Supply outside OPEC stayed weak, rising by just over 200,000 bpd in 2007, while output in member-countries of the Organisation for Economic Co-operation and Development (OECD) fell for a fifth straight year, BP said.

OPEC production dropped by 350,000 bpd following production cuts implemented in November 2006 and February 2007.

Increasing Number of Producers joining the ranks of Peak or Declining Production - Too many countries are in peak or declining production. There simply is not enough production growth to offset declines.