The graph below shows U.S. crude oil inventory levels for 2006 were substantially higher than 2005 levels for most of the year.  However, December 2006 inventory levels droppped substantially from November 2006 levels.  December 2006 month end inventory levels were less than December 2005 month end inventory levels.  Graph below does not include Strategic Petroleum Reserves.  However, for the month of December 2006, there was no change in the Strategic Petroleum Reserve Inventory levels.

U.S. Crude oil production has steadily declined since its peak year clear back in 1970.   Since 1992 there has been a decline for every year.  However, in 2006 for September thru December production outpaced production for the same time period in 2005.  U.S. Crude oil production in 2006 will probably either be equal to or greater than production for 2005.  The graph below shows that the United States with all the production from the Gulf of Mexico may be able to halt the steady production decline.

World crude oil production for 2006 will probably be less than 2005 crude oil production.  Global inventories of crude oil in November 2006 dropped 50 million barrels compared to October 2006 crude oil inventories.  When there are significant drops in U.S. and Worldwide inventories of crude oil, it is a strong indication that we are near the World's peak production of oil!!!!!!  Annual Consumption of crude oil for the last 25 years has been greater than annual new discoveries/additions of crude oil.  This means there is significantly less crude oil to be used for future production/consumption than there was 25 years ago.  The demand for crude oil has been increasing at about 2% increase every year.  This increased World demand for crude oil for the next 20 years was expected to be supplied by increased production from Saudi Arabia.  The oil fields of Saudi Arabia are beginning to show a production decline.   2005 crude oil production from Saudi Arabia was 9.55 million barrels/day compared to only 9.23 million barrels/day for 2006.  This annual decrease for Saudi Arabia crude oil for 2006 was able to be offset by a .16 million barrel/day increase for Russia for 2006 and a .22 million barrel/day increase from Rest of World(Kazakhstan,etc) for 2006.  Future World Supply of Crude oil will probably struggle to keep pace with World demand for crude oil.  The World must start decreasing demand for Crude Oil by providing alternative fuels(coal gasefication, tar sands, ethanol, hydrogen fuel cells) and improving fuel efficiency of cars and trucks(little or no improvement in average fuel efficiency for the last 25 years).

In 2005, U.S. Oil Companies spent over $33 million dollars lobbying Congress and the Bush Administration.
Table below shows what the major U.S. Companies spent in 2005.

It is no secret about the huge amounts of money the oil companies spend for lobbying, political campaigns, and advertising. This has been going on for over a hundred years(advertising has used not only TV but also radio and newspapers). There has been a long history of the oil companies spending big sums of money to get favorable regulation treatment, get land and coastal areas opened for drilling, pass legislation favorable to oil companies, get huge tax incentives and tax breaks passed that are favorable to the oil companies, and to influence elections to get candidates elected whose views and goals are aligned with what the oil companies want.

In 1979, U.S.and British Oil Companies controlled 27.8% of the World’s oil production. In 2006, U.S.and British Oil Companies controlled only 14% of the World’s oil production. During current times it is a lot harder for U.S. or British Oil Companies to manipulate oil production because most of the World’s Oil Production is controlled by state-run companies from countries such as Saudi Arabia, Mexico, Venezuela, and others. In 1979 the United States imported less than 27% of its crude oil versus in 2006 it had to import over 66% of its crude oil. It would be difficult to make the argument that the U.S. Oil companies still have the ability in 2006 to manipulate crude oil prices.

The situation with refined gasoline is much different than the situation with crude oil. No new refineries have been built in the United States since 1976 and since 1993 U.S. refineries have been operating at 90% or higher of total capacity available. The United States refineries produce 88.2% of the refined gasoline used in the United States with the other 11.8% of gasoline requirements being supplied by imports of refined gasoline. The supply of gasoline from September 2005 thru July 2006 has been in short supply not only in the United States but also Worldwide. United States inventories of gasoline for 2006 thru the month of July have been generally less than inventories for the same time period in 2005. However, United States inventories of crude oil for 2006 have been well above inventories for the same time period in 2005. U.S.supplies of gasoline have been tight for 2006 thru the month July whereas the supplies of crude oil for the United States have been more than adequate for all of 2006.

The California Energy Commission has published some very interesting statistics on gasoline margins for the State of California on their web page,http://www.energy.ca.gov/gasoline/margins/ . The web page shows the various components such as taxes, crude oil cost, refinery cost and profit, and distribution/marketing/retail gasoline profits that account for the retail price charged for gasoline. Refinery costs and profits for 2006 for branded gasoline ranged anywhere from $.30/gallon to $1.08/gallon. Distribution/marketing/Profits are cost and profits incurred by the retail gas stations. The costs and profits for the retail gas stations for 2006 for branded gasoline ranged anywhere from -$.04/gallon to $.32/gallon. Why are the oil refiners able to have a wide range for their costs and profits($.30/gallon to $1.08/gallon) compared to the retail gas stations which have a narrow range for their costs and profits($-.04/gallon to $.32/gallon). The answer is there is a whole lot less competition for refiners than there was 20 years ago. The total refining capacity in the United States is approximately the same as what it was 20 years ago. The big and medium sized oil refineries have expanded their capacity while the less profitable smaller sized oil(usually independent) refineries have shut down. At the same time the big eight oil companies have merged into the big four oil companies in the last 7 years(Exon-Mobil, Chevron-Texaco, BP-Amoco, Conoco-Phillips). The big four oil companies who also own close to 50% of the domestic refining capacity have shown record profits for much of 2006.

If the supplies of refined gasoline have been tight for January-July 2006, how can the big 4 oil refineries flood the market with excess gasoline to influence the Congressional elections. Typically demand for gasoline drops off dramatically after Labor Day weekend. However, $3/gallon gasoline along with increased use of ethanol had dropped demand for gasoline prior to Labor Day weekend. Additionally we did not have any hurricane catastrophes shut down refinery operations in the Gulf of Mexico for 2006 that occurred in 2005. The big 4 oil companies who control close to 50% of the domestic refining capacity for the United States would normally reduce refining production if inventories of gasoline were dramatically increasing and prices of wholesale and retail gasoline were also dramatically dropping. Instead we see U.S.inventories continue to dramatically increase over an 8 week period from 11 Aug 2006 to 29 Sep 2006 at the same time that U.S. production of refined gasoline has dramatically increased. The two charts below show how for the last eight weeks, the United States refiners have had extremely high production rates well above 2005 levels while at the same time inventory levels have dramatically increased well above 2005 levels. During this same time, the retail price of gasoline has dropped from $3/gallon to $2.10/gallon because excess gasoline has flooded the U.S. market. The first chart shows that for 2006 prior to 11 Aug 2006 were only 2 times that 2006 production of refined gasoline exceeded 2005 levels for same time period by 500,000 barrels/day or more. For the eight weeks from 11 Aug 2006 to 29 Sep 2006, 2006 U.S. production of refined gasoline exceeded 2005 levels by 500,00 barrels/day for six out of 8 times. Additionally for the week ending 29 Sep 2006, production of refined gasoline exceeded 2005 levels for the same time period by 1.4 million barrels/day. The second chart shows that for 2006 prior to 11 Aug 2006, there were only 2 times that 2006 U.S. inventories of refined gasoline exceeded 2005 levels for same time period by 5 million barrels/day. For the eight weeks from 11 Aug 2006 to 29 Sep 2006, 2006 U.S. inventories of refined gasoline exceeded 2005 levels by 5 million barrels or more for 8 out of 8 times. Additionally for the week ending 29 Sep 2006, inventories of refined gasoline exceeded 2005 levels for the same time period by 19.6 million barrels.

It is estimated that refinery capacity worldwide from 2004 to 2010 will increase from 84.6 million barrels/day to 93.9 million barrels/day.  This is an increase in refinery capacity of 9.3 million barrels/day for this time period for the World.  Meanwhile demand for crude oil is expected to increase from 82.6 million barrels/day in 2004 to 90.4 million barrels/day projected for 2010.  This is an increase in demand of  7.8 million barrels/day. 

"Proven Reserves" are the estimated quantities of crude oil which geological and engineering data demonstrate with a reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.  Unfortunately, the estimation of reserves is far from being an exact science.  Estimation of "World's proven reserves" involves two major items:

1. Determining the total volume of oil in place for every oil reservoir in the World
2. Determining what percentage of oil can be recovered from each oil reservoir.

Unfortunately, the volume of oil in place is never precisely known.  Determining what amount
can be ultimately recovered depends upon many assumptions to include the methods/techniques used to recover the oil and the levels of success for the methods/techniques used.  Estimates of reserves could easily be off by 20% of the 1.3 trillion barrels estimated for 2006 which calculates to 260 billion barrels of oil.  If the proven World Oil Reserves were over-estimated by 260 billion barrels of oil, it would be catastrophic for the world.  Estimates of the World's proven oil reserves from 2001-2006 increased for every year they were estimated except for 2004.

Estimates for World's Proven Oil Reserves

• 2001: 1.03 trillion barrels
• 2003: 1.21 trillion barrels
• 2004: 1.19 trillion barrels
• 2006: 1.29 trillion barrels

C.J. Campbell's previous chart showed net decreases in reserves from 1985-1999 totaling approximately 139 billion.  But instead of decreases for the World's oil reserves, the list above shows increases in the World's reserves.  The World's new discoveries for the past 21 years have been insufficient to replace the oil that has been consumed during the years 1985-2005.  World crude oil drilling activity peaked clear back in 1982.  World discoveries of new oil fields after 1970 have been substantially smaller in size than the World giant oil field discoveries made between 1890-1960.

90% of Saudi Arabia's oil production comes from five super giant fields discovered between 1940 and 1965.  The most significant of these oil fields in Saudi Arabia comes from Ghawar which was discovered in 1948  and which currently produces 5 million barrels/day.  Ghawar accounts for over 50% of Saudi Arabia's current production of crude oil.

Matthew R. Simmons, president of Simmons and Company International, analyzed over 200 technical papers on Saudi Arabia oil reserves and production from giant oil fields.  The facts have shown that the water-cut is over 30% for most of these giant oil fields and that state-of-the-art technology has been used to maintain high production rates from each of these major oil fields by employment of a careful and rigorous program of water injection into the peripheral areas of these fields to keep reservoir pressures high.   Simmons concludes that several of these major oil fields in Saudi Arabia are close to depletion due to maintaining high production rates for many years from these fields and an average life expectancy of 45-50 years for these fields.  Secondary recovery of oil from several of these oil fields is almost over and any additional output from these oil fields will be at substantially reduced production rates and at higher cost using tertiary recovery techniques(steam injection, in-situ burning,etc).  Simmons also expressed concern about the World's heavy reliance upon Saudi Arabia's huge oil fields that are near depletion and that new discoveries of new oil fields in Saudi Arabia have been insignificant.  Saudi Aramco(Saudi Arabia's state run oil company) has used state of the art geophysical tools to find new oil sources.  The only real commercial success was Hawtah Trend(200,000 barrels/day). 

Secrecy has surrounded Saudi Arabia's oil production and reserves for decades.  Many OPEC countries have artificially increased their proven reserves because in the past OPEC production quotas were based upon proven reserves.  If an OPEC nation, wanted to produce more oil and still be within their OPEC mandated quota, they would artificially raise their proven reserves.  Saudi Arabia's proven reserves saw two big jumps  in proven reserves that were not accounted for by any new substantial discoveries of oil. In 1979 Saudi Arabia's proven reserves jumped from 108 to 169 billion barrels and in 1988 jumped from 170 to 255 billion barrels of oil.

Both the International Energy Agency and and the Department of Energy-Energy Information Administration assume Saudi Arabia output of crude oil will double over the next 15-20 years and this will provide most of the increased supply needed by the World for future through the year 2025.  With the industrialization of China, India, and the Far East, the demand for crude oil is expected to increase approximately 2%/yr on the average for the next 20 years.  To meet the
global demand for oil, Saudi Arabia will need to produce 13.6 million barrels per day by 2010 and 19.5 million barrels per day by 2020.  Saudi Arabia in 2005 only produced 9.6 million barrels a day.  Even Saudi Arabia oil officials privately caution that production beyond 12 million barrels per day would damage the oil fields.

A dramatic decrease in production results as aging oil fields that are well past their peak production continue to operate along with an increased use of stripper wells that produce less than 10 barrels per day of crude oil.  California oil production peaked in 1985 at 424 million barrels with 50,525 oil wells in production. In 2004, production dropped to 268 million barrels with 47,881 oil wells in production. If all oil wells in California were equivalent, production in 2004 (based on total oil wells in production) should have been 94.8% of the production for 1985 or 402 million barrels. What are some of the reasons that production dropped clear to 268 million barrels for 2004?

• Out of the 25 largest oil fields in California: 5 were discovered prior to 1900, 10 were discovered from 1900-1920, and 7 were discovered from 1921-1940. Output from these large fields is down due to oil depletion and some of these oil fields are completely depleted.
• Most all of California's current production of oil, including from oil fields discovered before 1941, comes from oil wells built after 1969.
• Most of the oil fields discovered after 1940 have much smaller amounts of recoverable oil compared to the oil fields discovered prior to 1941.
• In 2004, 53.5% of the total producing oil wells were stripper oil wells producing less than 10 barrels/day.

References:

http://www.hudson.org/index.cfm?fuseaction=research_publications_list&resType=MdEas

Matthew R. Simmons, "The Implications of Saudi Oil Declining", Hudson Institute(Sep 9,2004)

http://www.iags.org/n0331043.htm

"New Study Raises Doubts About Saudi Oil Reserves", Institute for the Analysis of Global Security( March 21,2004)

"Summary of Operations 1915-1973", "Annual Reports 1974-2004", California-Department of Conservation-Division of Oil,Gas, and Geothermal Resources, http://www.consrv.ca.gov/dog/pubs_stats/annual_reports/annual_reports.htm