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| One Oil Analyst's thoughts. |
| 2006-04-24 |
| Yergin does cover all the same ground though I suspect from a somewhat different perspective! We will see. My "century of war" is winging its way to me on $75 bbl i.e. petrol @ 100p litre. Now, peak oil is of course the reason given by folk to suggest that the current high prices are here to stay and not what they actually are which is this - perhaps the "mother of all commodity cycles" (sorry, couldnt resist). Heres how it happened and what I think will happen next 1. OPEC underinvested as their domestic budgets spiraled and oil prices collapsed though the 1990's. Spending could not be cut as the bankrupt undemocratic govts of OPEC have to stuff their populations mouths with gold to keep them quiet which incidentally is the major reason for their catosptrophic failure to develop non-oil economies hence perpetuating the "oil curse" 2. As globalisation rolled out, the information revolution alongside, and in particular as China decided to join the anglo-saxon global economy and lift themselves out of poverty, a massive demand surge unparrallelled in the history of oil demand has led to tight markets with the global shock absorber of OPEC spare capacity (the real OPEC "secret deal with the west" - higher prices in return for price stabilisation) left at all time lows. 3. At the same time the very same forces of globalisation and in particular the end of the foreclosure of Muslim societies by satellite TV, mobile phones, internet etc. have led to the clash of civlisations as threatened Muslim powers lash out in all directions and play to fundamentalism. The resulting fear of supply interruption that would not have much affected oil markets in normal times now causes massive rises due to the lack off spare capacity. 4. Due to the new low interest rate / low yield environment of the global economy, the rise of return hungry hedge funds and the deep and liquid oil market (easy(er) to risk manage) speculative funds have been placed in commodity markets on a historically unparralelled scale. The CBOT commitments of Traders report shows these flows have recently been at a historical record maximum net long for non-commerial investors (non oil industry ie. speculative) 5. Supply has not been able to respond at its usual pace in previous price spikes because a. OPEC's share of reserves is rising and western oil companies are locked out with domestic monopolies, almost totally politically controlled, given the sole rights. It is these same companies that failed to invest causing the spike in the first place! Only now are modest (given their massive reserves and the pitifully low cost and great ease of extracting them) production expansions underway in OPEC b. non-OPEC supply is rising now but was slow as western oil companies refused to raise their planning hurdle rates. This has now happened with BP looking at $40 LT with probably a real "internal" hurdle rate of $30/bbl. non-OPEC new production opportunities are also increassingly limited as reserves fall and environmental pressures are applied. 6. In this tight supply high price environment enriched govts are beginning to think they can p*ss around like silly schoolboy bullies (Russia and Iran) and play a bit of mob politics (that will of course cause their peoples untold economic damage regardless of what other effects they elicit). Leading us to today. So what next? Well. These high prices are being borne by the world economy in large part because a. the developed western economies are only half as oil dependent (as a % of GDP) as in 1970 - less metal bashing (sob) b. the developing world has such massive momentum from its huge pool of cheap labour that higher oil prices, although a significant proportion of costs, can easily be absorbed as we see in China c. globalisation is perhaps the greatest leap forward in humanities welath creation potential since the industrial revolution. Its simply unstoppable!! (with perhaps a few recession son the way along the medium/long term steep uptrend - not perfect Goel LOL) So crazy high prices (3 times the cost of the most expensive current production!!) may well continue. But this means that conventional oil will increasingly be displaced as new fuels and new energy sources are developed because they are now cheaper than oil. In time, perhaps less time than anyone can imagine, without OPEC action, this could spell the end of the oil age. And that is why what WILL happen is that OPEC will collapse the market, kill the threat to oil as the power source of the world and return to business as usual. They HAVE to. Saudi has at least 100 years of production. What will it be worth if the oil age ends? But there is such momentum away from OPEC oil already that a painful and long collapse may well be required. $10 barrels anyone? For a number of years? As I say, the "mother of all commodity cycles" And thats why the myth of peak oil lies at the bottom of all this. Because the only reason this wont happen is if there isnt masses of cheap oil still left. There is masses of cheap oil still left. WS |
| Posted by:3dc |
| #7 Exconnelt assessment Zhang Fei. I'm losing -0- sleep over it. |
| Posted by: Besoeker 2006-04-24 21:34 |
| #6 phil_b: Nah, the problem is risk. The wellhead cost of oil in the major Middle East oilfields is $1.50/b and the industry worries that is the real floor price of oil. I agree. The ultimate problem with people who talk about alternatives to oil as an energy source is that there aren't any, cost-wise. Oil is the preferred energy source for several reasons - it is cheap to produce, packed with energy and easy to transport. Given its other characteristics, as long as oil is cheap to produce, it will remain the preferred energy source. The world doesn't have an addiction to oil - it has an addiction to cheap energy. And it's pointless for Americans to migrate to machinery that use more expensive (to produce and to buy) energy sources, because oil prices would simply fall to accomodate the drop in demand due to our self-imposed abstinence - benefitting our economic competitors at our expense. Think of these cockamamie schemes as an American subsidy to foreign oil consumers. Let the market work its will - as oil prices spike, countries that use oil for power generation will switch to more economical sources, like nuclear or coal power. People will start switching over to more fuel-efficient cars. Living closer to work will come into vogue again, as monthly gasoline bills start approaching $400 a month. Bottom line is that it's silly to get too worried about gas prices - if they go up, we will simply use less of it. Life will go on. And not resemble anything like a scene out of Road Warrior. |
| Posted by: Zhang Fei 2006-04-24 21:31 |
| #5 Time to establish the $10 bbl tariff for any price below $25 a barrel, let's have foreign suppliers start paying off our debts. God knows we've paid enough of theirs over the years. |
| Posted by: Jaiter Glarong1019 2006-04-24 21:27 |
| #4 We will get off the hydrocarbon economy around the same time Antartica becomes the only habitable continent. |
| Posted by: phil_b 2006-04-24 18:34 |
| #3 Oh no, phil_b, do you mean we won't move from the hydrocarbon to the carbohydrate economy next year? |
| Posted by: Nimble Spemble 2006-04-24 18:23 |
| #2 Nah, the problem is risk. The wellhead cost of oil in the major Middle East oilfields is $1.50/b and the industry worries that is the real floor price of oil. Developing oilfields that have much higher costs sets them up to lose enormous amounts of money, even though as the author points out the higher costs may be less than a third of the current price. However, he is dead wrong about higher oil prices encouraging 'alternative fuels'. Higher prices will encourage production of oil from alternative sources. The reasons are the enormous inertia in how energy is consumed and basic economics. |
| Posted by: phil_b 2006-04-24 18:01 |
| #1 Flying out of Austin a few months back, I sat next to a senior geologist. He figured mother earth was still in the oil producing business. He also said there was plenty remaining, the challenge was getting at it. |
| Posted by: Besoeker 2006-04-24 17:10 |