Declining Oil Production = Rising Inventories?

Somehow, when I was writing the post about whether oil producers are keeping oil in the ground rather than storing it in inventories, I missed this story in the WSJ:

The world's top oil producers are proving unable to put more barrels on thirsty world markets despite sky-high prices, a shift that defies traditional market logic and looks set to continue.

Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.

There are several reasons behind the net-export decline. Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. At the same time, aging fields and sluggish investments have caused exports to drop significantly in Mexico, Norway and, most recently, Russia. The Organization of Petroleum Exporting Countries also cut production early last year and didn't move to boost supplies again until last fall.

In all, according to the Energy Department figures, net exports by the world's top 15 suppliers, which account for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers.

The Fed has been cutting interest rates for 9 months now, so a year-over-year drop in oil production comports with Jeff Frankel's theory that interest rates are driving up oil prices by encouraging producers to keep oil in the ground. The drop in production does prove Frankel's theory, but it's a good data point.

The WSJ story also has this great chart:



UPDATE: I praised The Economist earlier today, but this week's cover story on oil prices is a clunker. Among other mistakes and omissions, it fails to recognize that keeping oil in the ground can be the same as hoarding oil in inventories:

The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused.

This is true only if the price of oil isn't exptected to rise. If, however, the price of oil is expected to rise, then oil companies would hoard oil underground because they could extract it and sell it for a higher price later. I personally don't think this is happening on a large enough scale to affect oil prices, but I wish The Economist would make sure the author understands the argument before dismissing it in a cover story.