Hacksaws and other reasons for high oil prices

I am adjusting to the knowledge that Shell has left one of its most valuable oilfields vulnerable to enterprising fellows with hacksaws. That’s right folks: Shell has declared force majeure on its Nigerian Bonny oilfield, where it produces more than 200,000 barrels of exceptionally valuable light crude a day, because one or more guys with hacksaws went at the line in order to drain off oil for the black market. The loss of Bonny light is among the factors that are currently roiling the global market for Brent crude.

All this time, I had thought that fighting, sabotage and relatively sophisticated theft was responsible for outages in this Niger Delta field, which was producing 500,000 barrels a day until 2005. But that turns out to be terribly naïve.

Are there no pipelines invulnerable to hacksaws? I decided to investigate. As it happens, pipelines are not so formidable, especially if you are in possession of a handy-dandy portable model manufactured by CS Unitec. According to promotional material, the Unitec "will cut 24-inch diameter pipe at 90 degrees in one pass." A single pass! Easy to get away, it would. And, according to this equally handy map available on the Internet, part of the Shell pipeline is precisely 24" in diameter! The ad goes on:

It is ideal for on-site cutting of pipes, tanks, structural steel and many other materials. The hacksaw’s compact, lightweight (16 lbs.) design makes it easy to handle and operate, even in confined spaces. With a 1.5 HP air motor, it has the strength and features demanded for tough environments in chemical plants, refineries, power generation, offshore oil, pipeline construction, mining and marine."

Is the Unitec not tailor made for Bonny light (potential target pictured above)? And at just $3,995, it has hydraulic, pneumatic and electric versions.

Enough on the trouble in Nigeria. Elsewhere, we are hearing everything on the global oil spectrum from dire forecasts of calamity including oil-driven confrontation between the West and China, to predictions of a possible price decline into the mid-$80-a-barrel range, made by analyst Phil Flynn of PFG Best. Read on to the jump for more on prices.

Why are forecasts all over the map? Traders are looking at the lack of spare oil production capacity — ready-to-produce oilfields lying idle — along with rising Chinese demand.

For more on this angle, see the coming issue of Foreign Affairs, where Robert McNally and Michael Levi try to plumb the mysteries of oil prices (temporary access to the subscription-only site). They do not get far — their anti-climactic top-line conclusion is that oil prices are volatile, and will remain so, a deduction that every person on Earth with a driver’s license no doubt made quite some time ago.  

McNally and Levi assert that the "economic and national security implications are stark," but surely they do not mean as a result of volatility: Volatile low oil prices, say in the $50-$60 a barrel range, are not economic or security threats, at least to consuming nations. So one presumes that, without actually saying so, McNally and Levi actually are predicting relatively high and volatile prices. If so, I hope that they comment in the space below.

Such a forecast would align McNally and Levi with Goldman Sachs and other pure commodities analysts, who do not foresee supply catching up to demand any time soon. On the other hand, a new report by James West at Barclays Capital reports that oil companies around the world are in an explosion of spending on exploration — Big Oil as well as smaller, independent companies are on course to fork out more than half a trillion dollars on exploration this year ($529 billion to be precise), or 16 percent more than the $458 billion that they spent in 2010.

These companies are so spending partly because of the above forecasts of high oil prices. Of course, if they produce too much, prices will again head down.