Mixed news about global oil supply these days and whether there's enough production to meet demand. Even if there is now, the crunch might really hit in three to five years, and that's without a disruptive geopolitical event.

A round-up of factoids for you, just in case your summer is going too well.

First of all, a report released Wednesday by the U.S. Energy Information Administration showed that crude oil stocks in the U.S. were down. From the Aug. 2 AP story on Yahoo! Asia:

The report showed crude oil stocks declined by 6.5 million barrels last week, far more than the 690,000-barrel decline analysts surveyed by Dow Jones Newswires, on average, had expected.

At the same time, there was some good news for consumers:

... Wednesday's report added to a sense that the refining industry has finally recovered. Gasoline futures, and retail prices, have fallen sharply in recent weeks.

On Wednesday, investors initially reacted to the EIA report by buying oil on the news of declining crude inventories. That sent oil prices to a record Nymex intraday high of $78.77. But gas futures fell on the refinery and gasoline inventory news. As the slide in gasoline futures prices accelerated, oil prices followed, analysts said. Gas futures fell more than seven cents a gallon on Wednesday, while September oil ended the day down $1.68 a barrel.  ...

Analysts said Wednesday's oil price slide could portend the beginning of the end of a months-long bull market. Most predict prices will follow their typical seasonal pattern and decline in the fall. It's just a question of when that slide will begin.

Other than falling oil inventory levels, "every other variable in the energy complex looks bearish from our vantage point," wrote Jim Ritterbusch, president of Ritterbusch & Associates, in Galena, Ill., in a research note. "With both product markets (gasoline and heating oil) showing increasing reluctance to follow the crude price higher, the odds of further crude price weakness are sharply increased."

So prices might be on their way down in the fall. Woo-hoo!

Or not. Observe this Aug. 3 Business Week analysis:

Unlike in previous periods, the main driver in the recent price boost is not a war, a hurricane, or the machinations of OPEC, but rather robust global economic growth, say analysts. The U.S. economy has remained solid, despite jitters in the stock market. China and India are surging, while most of Europe is strong.

That observation is buttressed by this column published July 31 in the Salt Lake Tribune. Gwynne Dyer wrote the following:

The truly significant change in the situation is the stagnation of supply, not the rise in demand. New oil fields are much smaller than discoveries in the previous generation (the last really big oil domain to be developed was the North Sea in the 1970s), and they tend to be in much more remote places.

Now, back to Business Week:

Even as high oil prices are a symptom of a strong economy, however, they could ultimately put the brakes on economic growth. The darker side of the growth issue is that the price spikes caused by competition for scarce supply could ultimately cause inflation, a recession, and increased geopolitical friction.

Supply Squeeze Ahead

A July 9 report by the Paris-based International Energy Agency (IEA) stated that global spare oil production capacity will shrink after 2010, and because global demand will outpace supply, a "supply crunch" is likely.

Global oil demand is forecast to expand by 2.2% per year on average, the IEA said, led by Asia and the Middle East. Chinese oil demand will reach almost 10 million barrels a day in 2012, and China will only produce 3.9 million barrels domestically. Global oil consumption is expected to reach 86 million barrels a day this year, 1.5 million barrels more than in 2006.

The report said that OPEC's supply cushion of unused capacity will rise until 2010, but then decline to "uncomfortably low levels." And while non-OPEC production growth in regions like Brazil and Russia will be strong, it won't produce enough to quench the thirst of developing and industrialized regions. Further, the biggest increases in non-OPEC production will come from nations that produce heavy oil, which is more expensive to extract and refine than light, sweet crude.

One expert quoted in the above article said the market will be watching to see if oil punches through the US$81 per barrel level. If it does that, then it might not stop until it hits US$91 per barrel. Throw in a major supply disruption, and we could see oil over US$100 per barrel by year's end.

Now, if you live out West and are paid in petrodollars, it's all good.

But the United States, sustained $80 per barrel oil could hurt the economy. From the Aug. 2 BBC story:

Sustained oil prices close to $80 a barrel could hit US economic growth, Energy Secretary Sam Bodman has said.

The US economy has never faced such high prices for "an extended period," Mr Bodman warned.

There is concern about whether oil supplies can meet global demand and Mr Bodman urged oil producing nations to increase output to avoid shortages.

Oil prices have fallen back slightly after hitting a record intraday high of $78.77 a barrel on Wednesday.

Raising oil supply is one way to bring the price down. The Organization of Petroleum Exporting Countries (OPEC) has a big meeting in Vienna on Sept. 11 and will release some production data two days later. On Wednesday, the International Energy Agency urged OPEC to boost production to help reduce prices.

Indonesia's energy minister said on Aug. 3 that his country hasn't yet discussed the issue with other OPEC members. However, Indonesia is closely watching the market to see whether the current high price is a blip or sustained.

But the thing is, OPEC countries raised production in July -- by 150,000 barrels per day. Qatar claims there's lots of oil available and that high prices relate to refinery bottlenecks and geopolitical issues.

OPEC nations are also spending more on exploration and that could reduce the risk of a supply crunch in the short to medium term. From a July 31 Financial Times story:

The Organisation of the Petroleum Exporting Countries, the cartel that controls three-quarters of global oil reserves, on Tuesday said that its members operated 336 oil rigs last year, an increase of 11.5 per cent since 2005, in response to strong demand from developing countries such as China and India.

The cartel’s annual statistical bulletin shows that member countries were operating the second largest oil rig fleet since 1982, when oil prices hit an all-time high in today’s money of about $90 a barrel. US oil prices on Tuesday rose to $78.23 a barrel, just below the $78.40 nominal high.

The number of oil rigs in operation is seen as one of the best estimates of investment trends. Oil producing countries rarely give out data on the amount of money they invest. Opec is financing its capacity expansion on record revenues of $650bn last year, up 22 per cent from 2005.

The International Energy Agency, the industrialised countries’ energy watchdog, recently warned of an oil “supply crunch” within five years as a result of accelerating consumption growth and output falls in mature areas, such as the North Sea, and long delays in new production projects.

But the sharp increase in Opec’s new investment could reduce the risk of oil demand outstripping supply and lessen long-term oil prices pressures.

This Aug. 2 CNet News Blog posting points out that while prices are up for oil, so are exploration and production costs:

Cambridge Energy Research Associates says the capital costs for extracting oil have gone up 80% since 2000. The price of crude, meanwhile, has about doubled. Thus, revenue is going up but expenses are keeping pace.

The production cost of a barrel of oil have risen from $5 in 2001 to $20.40 last year, according to Lehman Brother. The firm said the cost should rise $5 to $10 a year for several years.

Drilling projects in Kazakhstan and the Sakhalin Islands have been delayed for several years, in part because of spiraling costs.

For me, the bottom line appears to be that we have adequate oil supply for now, but demand will continue to grow while conventional supplies dwindle and becomes more expensive to find. This will continue to push prices up. A more serious crunch is likely coming. The question is whether we can adapt to it with a minimum of economic disruption, or whether there will be a sharp, sustained one.