Tuesday, September 13, 2005

Missing Barrels are Back

Once upon a time there was a "missing barrels" story. The story goes back to 1998/1999 when the Oil Market Report (OMR) of the IEA was blamed for the reason of price panics of 1999. The report became under attack when it showed almost 2 Mb/d stock built and miscellaneous to balance for the year 1998 in its Annual Statistical Supplement - the perceived existence of ‘missing barrels.’

Several speculations have been made about ‘missing barrels.’ Mabro stated that there was an upward bias in IEA’s production estimates. Horsnell claimed that ‘missing barrels’ were almost certainly comprised of firstly an underestimation of World oil demand, and secondly an overestimation of OPEC supply.

In addition, Matt Simmons emphasized that ‘missing barrels’ simply cannot be true because it is not possible to hide that much oil even though there exists many off-shore storage facilities, meaning something is wrong with the data.

The IEA revised the numbers and broke down and 2 Mb/d “missing barrels” were reduced to 1.6 Mb/d. And later on, the case was closed.

Now, we see another price panic. But this time, the prices go up. Apparently, supply can not meet ever increasing demand, because Chinese are drinking oil! Therefore, the IEA and all others demand production increases

But wait a minute. The August 2005 issue of OMR shows that in second quarter of 2005, supply was 84.5 Mb/d and demand 81.8 Mb/d. This means, more supply than demand. And the difference, 2.7 Mb/d is “missing.” This is the biggest ever “missing barrel” reported in the OMR, if I am not wrong.

If 2.7 Mb/d produced oil is somewhere out there, why the prices are going up? Is it that easy to stock that much oil, as Simmons once argued? If yes, why are we crying for more oil? Or am I missing something?

References cited:

Simmons, M.R. (1998), An “Arithmetic Mystery”: Missing Oil, Simmons & Company International, available at www.simmonsco-intl.com/files/042498.pdf.

Mabro, R. (2001a), Does Oil Price Volatility Matter? OIES Monthly Comment, June 2001.

Mabro, R. (2001b), Transparency in Oil Markets and Other Myths, OIES Monthly Comment, February 2001.

Horsnell, P. (1998), The Strange Case of the Missing Barrels, OIES Monthly Comment, December 1998.

Note: The term “missing barrels” refers to the difference between the implied (calculated) and observed physical inventory changes, i.e., the positive balancing item in stocks.


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