I read an article today in the Wall Street Journal that also cautions that there will be “declining global crude production”, as Bigelow puts it. It mentions a boomerang effect that may send oil and gas prices soaring. Bill Gates’ investment may pay off yet.

U.S. refiners would seem to want to store barrels of crude oil and finished products for future use especially with the current price of crude oil at its lowest ebb in thee years. However, banks have been very restrictive on credit lending for speculative purposes and the cost of borrowing to do so has risen.
Crude will be a very tough call after first of the year as so much will depend on the economy. If that gets much worse crude could fall to 40 bucks per barrel (there are 42 gallons in a barrel of crude oil) before the end of this year. No one will be flying, fuel demand will keep dropping and the big consumers of energy like China and India will be cutting back their demand even further. In any case we are setting ourselves up for a spike in crude oil sometime in the near future as many crude oil production projects are now being cut back or canceled.
There will be a big demand for Very Large Crude Carriers for use as floating storage at the end of this year because of LIFO (Last In, First Out) issues and refining utilization rate cuts. With the LIFO method of accounting, refiners watch their year-end inventories very carefully. It all depends on how each refiner started the year since end of year inventory levels will be determining either big profits or big losses for the year. The crude price contango, which happens when the futures price is above the spot price, helps to make up for the storage costs. That difference is about 75 cents per barrel for December 2008 to January 2009 trading. Instead of dumping crude oil, they could then hold on the barrels but only if they have the capital to invest in floating storage for up to two million barrels per VLCC. If a player holds crude oil off shore, there are no ad valorem taxes applied as they would be for on shore inventory.
On top of that The EIA now estimates OPEC’s surplus production capacity could rise from about 1.8 million barrels per day to 4 million barrels per day by the end of the next year. The ten-year average is 2.9 million barrels per day. OPEC spare capacity will reach at least 3 million barrels a day, which would provide Saudi Arabia with a cushion large enough to provide a capability to dampen the impact of future disruptions or geopolitical uncertainties on crude oil prices.
This presents the possibility for “the perfect storm” in the crude oil market along with overall fuel demand being down in the U.S. After the first of the year all of the refiners with empty tanks and enough capital will be scurrying to get them filled up in anticipation of switching their production to summer gasoline. The price of crude will be driven by market conditions instead of the other way around. Crude oil prices will initially go back up and settle in the 60’s before taking another big hike in time for the start of the summer driving season.
Either way there will be a rude awakening for gasoline consumers on January 1, 2009.

Bob van der Valk is a petroleum industry and fuel-pricing analyst residing in Issaquah, Washington.

My viewpoints about the petroleum industry can be found at website address: http://www.4vqp.com/ourconsultants/thegasguy.html