Are High Oil Prices Here to Stay?
With oil prices rising on a daily basis, Goldman Sachs’ analyst Arjun Murti’s prediction of $200-a-barrel oil seems more and more realistic. Regardless of whether and when that number is reached, there is a growing realization that the days of cheap and plentiful oil are gone forever. While it may be too soon to say that oil production has reached its peak, fears are mounting that energy savings in the developed world will not be enough to offset the rising demand from developing countries.
Today’s New York Times takes a look at Murti’s prediction, which is based in part on the fact that production is declining in non-OPEC countries such as the UK, Norway and Mexico.
“The fact that the U.S. gasoline demand can be down and that the U.S. gasoline consumer is no longer driving world oil prices is a monumental event,” Mr. Murti says. He spends most of his time talking to money managers and analysts, many of whom keep asking him if oil prices will stay high if speculators abandon the market, and says he applauds investors for driving up oil prices, since that will spur investment in alternative sources of energy.
Carola Hoyos of the Financial Times’ offers a thorough, and largely discouraging, assessment of the current situation:
A series of recent events certainly appears to lend credence to those who argue that the world’s ageing oilfields are being sucked dry amid China’s and India’s determination to lift themselves out of poverty and the west’s reluctance to give up the luxuries of modern oil-dependent life.
The report highlights the belief that Russia’s oil production may have peaked and raises questions about Saudi Arabia’s ability to pump more oil. Matthew Simmons, an energy investment banker took the news that Saudi Arabia was not planning to expand to 15m b/d as further evidence that the kingdom was struggling to ward off a collapse of its oilfields. Simmons notes that the world depends on just a few giant, old, declining oilfields and that almost nothing to match them has been discovered since the 1970s. One in every five barrels of oil consumed each day is pumped from a field that is more than 40 years old.
Not a single field discovered in the past 30 years has ever been able to produce more than 1m b/d and the number and size of fields discovered since then have been shrinking dramatically.
In fact, even if all the policies to increase renewable fuels and to use oil more efficiently were to be enacted immediately, the world would still need Opec’s daily production to increase by 11.5m barrels by 2030, the bulk of which would have to come from Saudi Arabia, the IEA says. That is a tall order, the FT says. It is 50-plus percent more than the amount by which Opec managed to increase output between 1980 and 2006. This time, the oil business is faced with a shortage of skilled labour (the industry’s average age is just shy of 50) and a squeeze in the supply of steel and other critical components.
In a leader in today’s paper, the FT wonders why higher prices have not spurred production:
One answer is that the big producers have all the revenue they can spend, and the higher prices climb, the less oil they are inclined to pump. After all, oil in the ground has so far proved a better investment than most assets a sovereign wealth fund could have bought with extra oil revenue.
The FT does see signs that the high prices are starting to have an impact on the demand side: “Sales of gas-guzzling light trucks in the US have plummeted and drivers seem to be curbing their mileage, too. Consumers are switching to tiny cars, bicycles and even (in Rajasthan, India) to camels. Once-marginal substitutes, such as wind power, start to look like profitable bets.”
There is no doubt that the world will adjust to high oil prices. Yet the adjustment would be far easier if oil producers discovered that they could expand their output.
He may still be in the minority in stating that oil production is peaking, but in adding his voice to the “peak oilers,” legendary oil investor T. Boone Pickens is helping tip the scales in that direction. As he told CNBC:
Eighty-five million barrels of oil a day is all the world can produce and the demand is 87 million. It’s just that simple.
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May 23rd, 2008 at 10:28 am
[...] current surging oil prices may be fueled in part by speculation and short-term supply-demand imbalances, longer-term trends [...]