As Oil Moves Above $112, More Crude From Brazil, Less From Russia

Aside from the tireless speculators and falling dollar, oil prices do seem to be rising because due to fear of falling demand. Mexico says it may ship less crude. Now Russia says its oil production may have peaked.

According to the FT "Even politicians are having to admit the country’s once double-digit growth has halted and at least one oil executive believes it will not, at least in his lifetime, be able to produce more than it has in the past two years." By most measures, Russia is the second largest oil producer in the world, so the news will send a jolt through the markets.

Not all of the news is bad. Brazil says it has found one of the world’s largest oil fields off of its coast. The Wall Street Journal writes that "the head of Brazil’s National Petroleum Agency, Haroldo Lima, said the strike could be one of the world’s biggest oil discoveries in decades, containing as much as 33 billion barrels in oil equivalent."

In the rough calculus of oil supply, the two pieces of news would seem to offset each other. But, they do not. While the decline in Russian production is with the global markets now, the Brazil discovery is in such deep water that it may not begin to produce at any meaningful level for several years.

In the meantime, oil demand is not likely to fall by much. There is a theory that a recession will drop demand in the US. There is no sign of that yet, Gas prices are still rising.

Oil producing countries in the Middle East and Mexico and Nigeria are keeping more crude at home to build infrastructure. They also want to power the rising number of cars used by their middle,and, sometimes, lower classes. Tata Motors is building a car for emerging markets which retails for as little as $2,500.

It would be wrong to say that the Brazil news is not good news. There are likely to be more discoveries of oil deposits over the next several years. They cannot, however, offset falling production from many of the world’s older fields and the inexorable rise in demand for crude.

Douglas A. McIntyre