Morningstar | Jan. 18, 2010, 8:03 AM
Remember the summer of 2008, when oil was approaching $150 per barrel and topping the headlines? The oil story quickly faded to the background when the financial crisis hit full-steam that September; we had bigger things to worry about in terms of the potential collapse of the worldwide financial system. Meanwhile, the deepening recession greatly reduced demand for oil. The price per barrel fell precipitously.
But while the world is awash in an excess supply of oil at the moment, I am convinced that the supply/demand balance of oil over the longer term is a critical issue that bears watching.
Oil is so important because it is, at the moment, the primary source of transportation fuel, and transport costs affect the entire economy. Low oil prices cut the cost of doing business and help reduce geographic barriers, while high oil prices act as a "tax" on the entire system and force us to act more locally.
I recently sat down with a group of Morningstar's energy analysts to discuss the idea of "peak oil." In this article, I will define the issue and share the group's insights.
Peak Oil Defined
At its core, peak oil is the idea that we will reach a point at which the rate of oil production cannot be increased because of geologic limits such as the size of the planet's resource base and the impact of natural decline rates. There are other limits to the rate of production, including above-ground factors such as investment rates and geopolitics, that further constrain production levels. To use an analogy, when thinking about the maximum amount of milkshake one can drink in a certain amount of time, the size of the straw and the ability to suck matters just as much as the amount of liquid in the cup.
The idea behind peak oil is credited to a geoscientist named M. King Hubbert, who worked for Shell back in the 1950s. In 1956 he published a paper that detailed a statistical method he developed suggesting that the rate of fossil-fuel production tends to follow a bell-shaped curve. The idea behind this is that after fossil-fuel reserves are discovered, production begins to increase exponentially until a peak production rate is reached; after that it begins to decline as depletion overcomes new discoveries.
When you look at the history of discoveries, it's pretty clear that we've already found most of the obvious oil fields. In terms of oil reserves, discoveries peaked in the 1960s, and the rate of discovery dropped below our annual consumption in the late 1980s. Today, we're using more oil each year than we find.
2009 was a banner year for oil discoveries, with a lot of headlines being generated by finds in Brazil and the deep waters of the Gulf of Mexico. In fact, we saw discoveries on the order of 10 billion barrels of reserves, the highest rate since 2000 when the giant Kashagan field in Kazakhstan was discovered. However, the world is consuming around 83 million barrels a day, which equates to 31 billion barrels a year. So even in this banner year, we are barely replacing one third of the oil we consume.
Are We Running Out of Oil?
In a word, no. Yet we have essentially found all of the cheap oil. Since Colonel Drake first drilled for oil in Pennsylvania in 1859, the world has used about a trillion barrels of oil. Estimates vary widely, but there are at least another trillion barrels of conventional crude oil reserves and perhaps two or three times that much if you consider unconventional (and higher-cost) sources, such as oil sands and oil shale. We're not going to run out of oil overnight, but it's fair to say that the first trillion barrels we consumed were the cheapest, easiest-to-access reserves.
When you look back at the East Texas oil boom early last century, oil wells were being drilled a few hundred feet deep. In the deserts of Saudi Arabia and Iraq, giant oil fields are so close to the surface that you could practically stick a straw in the ground and strike oil. These big, easy finds were relatively inexpensive to develop.
But check out where we're looking now: The latest Gulf of Mexico discovery, Tiber, is a well drilled to a depth of 35,000 feet and lies beneath 4,000 feet of water. Think about that; the well is a mile deeper than Mount Everest is tall. It will likely take 7–10 years before this discovery produces anything. While this is a significant discovery, it certainly isn't cheap oil.
We have established that cheap oil might be a thing of the past, and it is clear that we are using more oil than we find each year. Yet how does this fit into the notion that oil production is peaking? The key thing to consider is that an oil well's rate of production declines over time.
As oil is pumped from a reservoir, the pressure in the well begins to drop and the rate of flow decreases. This process is called a decline rate. One can drill new wells in a field to balance the impact of declines, but as an oil field is developed and drained from multiple wells, it reaches a point at which the whole field goes into decline. We saw this play out with Alaska's Prudhoe Bay, in the North Sea, and in the Cantarell field in Mexico. Now we can aggregate oil fields and look at production curves for countries in the same way, and we see that 40 of the 54 oil-producing nations are past their peak oil production. In the United States, oil production peaked in 1970 around 9.5 mb/d, but today our production is about 5 mb/d.
Let's put oil-field declines in context. World oil production is roughly 83 million barrels per day. Various estimates place the underlying global decline rate somewhere between 4% and 8% per year. That means that each year we have to add about five million barrels of new production to keep production flat. Step five years out, and we have to replace 25 mb/d of production, or about three times Saudi Arabia's current production. That's a lot of new wells that need to be started just to offset declines.
Plus, this does not account for any growth in oil consumption. Absent global recessions, underlying oil demand is increasing by about 1% per year. This means that five years out we'd need another 5 million barrels of oil per day just to keep the current equilibrium. Frankly, we're not certain that we'll be able to reach that level of production.
Have We Reached Peak Oil?
It is hard to tell, and we do not know. No one will know for certain except by looking in the rear-view mirror. A couple of our analysts attended a conference in Denver put on by the Association for the Study of Peak Oil and Gas a few weeks back, and the precise timing of peak oil is of considerable debate. In our minds, the exact timing is less meaningful than the fact that oil production will begin to decline at some point within the next five to 10 years.
One enlightening analysis at the conference was presented by Rembrandt Koppelaar based on tracking announced oil megaprojects and layering anticipated production gains on top of existing world production. His analysis provides a best-case outlook that shows we can bring about 25 mb/d of new production online by 2016, assuming announced projects are completed on time and result in expected new production. His analysis suggests that we will get to roughly 90 mb/d in 2014. Incidentally, this is roughly the level of production an increasing number of oil executives are discussing as a production peak.
The Demand Side
We've talked a lot about supply issues, but demand is just as critical. Over the past five years we've seen China and other emerging economies bidding barrels away from industrialized countries. In fact, demand from the developed world (defined as the OECD countries) is down by about 4% since 2000, while China's demand is up 60% and India's is up 40%. On a net basis, world demand is up about 8%. In a very real way, the OECD countries have become one of the larger "suppliers" of oil to the market by reducing consumption.
Looking forward, we see this trend continuing, especially if fuel-efficiency measures as well as hybrid and electric vehicles gain traction here. Gasoline consumption in the United States accounts for about 12% of total world demand for oil, and any sizable reduction in gasoline use will free up barrels for the rest of the world. Our efforts to boost efficiency and reduce consumption will certainly affect the supply/demand balance. As Benjamin Franklin might have said, a barrel saved is a barrel earned.
China: The Wild Card
On the other side of the coin, most of the demand story is China. Formerly an exporter, China became a net importer of oil in 2000. It produces about 4 mb/d but now consumes roughly 8 mb/d. China has been responsible for 4 mb/d of new demand since 2000, about half of incremental demand over that period.
One item worth looking at is the rapid growth in China's car ownership. In March, car sales in China overtook those in the U.S. for the first time, and sales are averaging 1.1 million new units a month. This is roughly twice the level of 2005 car sales. A big driver here was massive government subsidies that make "cash for clunkers" look downright stingy. But the core story of increased affluence, increased urbanization, and the availability of consumer financing seems to give real legs to Chinese auto demand. Just think, here in the United States we have a little less than one car per person in the country, but China's ratio is a little over one in 10. It makes sense that both ratios will get closer to one another in the coming years.
Another component here is the fact that China subsidizes fuel prices, so Chinese drivers, who pay even less per gallon than we do in the States, are not very exposed to price increases. If oil prices spike, the price of gasoline goes up in the U.S., and there's a demand response (witness 2008). But this impact is muted in China. As long as China can maintain a measure of economic stability, auto demand there is likely to continue its upward trek.
Of course, the big question mark is whether China can maintain its scalding-hot economic growth in the face of much slower growth in the U.S., given that China is still export-driven. If China runs out of steam and its GDP drops to, say, 3%–5% annual growth instead of the nearly 9% so far this year, quite a bit of oil demand would come off. China is the wild card.
What Happens to Oil Prices?
Whether or not prices keep escalating to ration tight supply remains the $64 billion question. We do think oil prices are likely to increase as oil supply begins to tighten again, but oil prices are tricky. To some extent, they reflect the state of the dollar. But, perhaps more importantly, high oil prices act as a tax on economies. When oil purchases begin to account for a material level of GDP, say, 4%–6% like we saw in 2008, economies cannot really bear that tax, and demand responds strongly. We don't think that we're likely to see oil shooting past $200 a barrel. Instead, we tend to think that high prices will cure high prices and lead to reduced demand. Some analyses we've seen suggest that $100 oil is enough to trigger another recession in the U.S. So high prices are likely to throw countries back into recession and reduce demand that way, which will result in a lower oil price.
The trick is this: Companies need oil to be above $60 or so to bring new production online. So we're on a narrow plank between the price required to bring on new production and the price that throws us back into a recession. And as we continue to push the frontier and supply tightens, the price to bring new production online begins to increase and the plank narrows. What do we do when Houston requires $80 oil to add new production, but oil prices that high keep us at recession's edge? We're certainly in a box that will be painful, but not impossible, to get out of.
Mammoth Discovery; Betting Big on South Texas Eagle Ford Shale. This is the hottest prospect energy companies have seen in some time.
This article was taken from the October 9th 2009 issue of the Houston Chronicle.
Last October, just as the economy was tilting into crisis, a small oil and gas company in Houston quietly announced the discovery of a mammoth natural gas field in South Texas that at any other time might have garnered bigger headlines.
Last October, just as the economy was tilting into crisis, a small oil and gas company in Houston quietly announced the discovery of a mammoth natural gas field in South Texas that at any other time might have garnered bigger headlines.
Petrohawk Energy's find, however, did not go unnoticed in the oil and gas industry - and it didn't take long before oil companies large and small began making their moves.
Today, though the economy and natural gas prices remain weak, the Eagle Ford shale remains one of the hottest prospects in North America, and energy companies are moving forward there even as they're pulling back elsewhere.
That's because of what some companies suggest is a virtually recession-proof combination of highly productive wells and low drilling costs they say can yield profits even as natural gas prices hover near seven-year lows.
Also attractive: the flat South Texas ranch land, where obstacles are few and Gulf Coast oil and gas infrastructure is nearby; and landowners have grown comfortable with the industry after decades of oil drilling.
"You can certainly make more money from wells than cows," said Joe Martin, whose family leased nearly 20,000 acres of land to Petrohawk in LaSalle County for drilling.
But it may still be a while before the full potential of the Eagle Ford shale is known. Though early results are promising, companies have been cautious about overstating what could be in the ground, especially since so few wells have been drilled so far.
"What we're going to find out, as with most shale plays, is there's going to be sweet spots," said Bob Banks, chief operating officer at Swift Energy, a Houston-based oil company with nearly 90,000 acres leased in the Eagle Ford. "That's what we don't know yet, which areas are really going to work better than the others because it's pretty early days."
Recently discovered U.S. shale plays, including the Haynesville in Louisiana and Marcellus in Pennsylvania, are expected to provide a major boost to U.S. natural gas supplies in coming years. The dense rock formations, once thought too difficult to explore, have been unlocked with the help of recent advances in drilling technology.
The core areas of the eight largest U.S. shale plays may contain 475 trillion cubic feet of recoverable resources, according to an estimate by Ross Smith Energy Group, an industry research firm in Calgary, Alberta. That's roughly ten times the size of Texas' famed Barnett shale play in the Dallas-Fort Worth area, which supplies nearly 10 percent of U.S. natural gas production, excluding Alaska.
$3.88 break-even point
While the Eagle Ford is among the smallest of the group, with some 19 trillion cubic feet of natural gas remaining, the economics is among the best, the firm said.
Producers in the Eagle Ford can break even when natural gas is priced as low as $3.88 per million British thermal units, the firm said, versus break-even prices of $5.18 in the Barnett, $3.74 in the Marcellus and $4.49 in the Haynesville.
Natural gas closed at $4.99 per million BTUs Monday in trading on the New York Mercantile Exchange, down from nearly $14 in summer of 2008, amid a recession-related drop in demand and bulging stockpiles. Consumption will fall by 2.4 percent this year and remain flat in 2010, according to the Energy Information Administration's most recent short-term forecast.
A potential boom
Yet that has not stopped companies from pushing ahead in the Eagle Ford play, which starts near the Mexican border and extends east below San Antonio across a string of counties including Webb, Dimmit, LaSalle, McMullen and Live Oak.
"It's got the potential of being a boom," said Martin, whose family leased to Petrohawk, noting that land prices in the region have risen to $1,500 per acre in some places, 10 times what they were two years ago.
Houston's Petrohawk, with 210,000 acres in the Eagle Ford, has been the most active. It operates 17 wells in the Eagle Ford and aims to add another seven or eight by year-end, said Joan Dunlap, the company's head of investor relations. This month, the company said it will sell its properties in West Texas' oil-rich Permian Basin to an unidentified privately held company for $376 million to focus on its assets in the Eagle Ford and Haynesville shale plays.
Asked if the Eagle Ford could be as big as other major U.S. shale gas plays, like the Barnett shale, Dunlap said, "it's a big question mark."
Other oil and gas companies including Pioneer Natural Resources, Swift Energy and Anadarko Petroleum Corp. also have drilled wells in the Eagle Ford or are planning to in coming months.
Less clear are the intentions of Houston-based ConocoPhillips and Irving-based Exxon Mobil Corp., each of which has large acreage positions in the Eagle Ford.
Houston's ConocoPhillips, with 300,000 acres, considers the region "one of the top resource plays in the lower 48" and will concentrate much of its 2009 exploration spending in the Eagle Ford and other North American unconventional resource plays, spokesman Charlie Rowton said. But he declined to elaborate.
Exxon Mobil confirmed it holds an interest in the Eagle Ford shale in La Salle and McMullen counties, but a spokesman said, "the details of the exploration program are considered confidential."
Bob Fryklund, industry analyst with IHS-Cambridge Energy Research Associates in Houston, said highly diversified oil majors may not have the same urgency to act as independent oil and gas producers do.
"This is just one portion of their portfolio, while for a lot of the independents it's their whole portfolio," he said.
But increasing moves by major international oil companies into U.S. shale plays, he said, suggest they may see more potential there than they once did.
Oil Prices Are Rigged? It Just Ain’t So! By Robert P. Murphy
This article is copied from the June 2009 publication of The Freeman: Ideas on Liberty, a flagship publication of the Foundation for Economic Education and one of the oldest and most respected journals of liberty in America. For almost 50 years it has uncompromisingly defended the ideals of the free society. Enjoy.
Even though oil prices have fallen and quieted the price-conspiracy mongers, you can bet that when prices go up again, they will be back in force. It happened last time. For example, in an article for Time last August, Ari Officer and Garrett Hayes ask, “Are Oil Prices Rigged?”. Our cynical authors—who are Stanford graduate students in financial mathematics and materials science/engineering respectively—answer in the affirmative, but their arguments are shockingly ignorant of how markets work.
Officer and Hayes admit up front that oil speculators aren’t the ones manipulating oil prices. Rather, they blame the oil producers for rigging the market, allegedly through the use of futures contracts:
The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future. . . . Such a contract allows companies to hedge positions by locking in prices early. . . . It’s all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?
An interesting possibility, to be sure, except for one nagging problem: If an oil producer is buying a futures contract from himself, that is equivalent to taking future supply off the market. To use a simplistic example, suppose a major producer estimates that he can sell 100,000 barrels of January 2010 oil at $90 per barrel or raise the price to $100 per barrel if he restricts his output to 75,000 barrels. The authors want to argue that he has a third option: “selling” 100,000 future barrels at $100, holding the price up himself by entering the futures market and snatching up those excess 25,000 barrels of January 2010 oil.
But in this third approach the producer is still extracting the same deal from his actual customers: They are giving him $100 each for 75,000 barrels of January 2010 oil. Since the producer himself bought the other 25,000 barrels, it is rather irrelevant that he received a high price for them; he can “pay himself” $100 a piece, if it makes him feel rich, but that still leaves him just as wealthy—and with just as much oil—as if he had simply cut his January 2010 output to 75,000 barrels. The existence of the futures market doesn’t give our producer any more ability to gouge his customers than his ownership of the oil in the first place gives him.
Final Consumers Have the Final Word
There is no getting around this basic fact, try as the authors might to bring up subtleties of the futures market.
They argue, for example, that only “Hedge funds, oil companies, OPEC—the very people who profit from massive, consistent increases in prices,” have access to the futures market. From this they conclude that, “we as oil consumers don’t set the prices.”
That’s simply untrue. Hedge funds can’t force refiners to buy more oil than they want to at a given price. If the “fair” price of oil, as determined by the “fundamentals” of supply and demand, is $80 per barrel, but the greedy hedge funds and OPEC buy up futures contracts and push the price up to $120 per barrel, then there will be a glut. That is, more physical barrels of oil will come to market than the actual end users will purchase. Oil inventories would grow larger every day, as producers kept pumping more oil than consumers burned.
Incidentally, this outcome is certainly possible. For example, if a group of rich speculators foresaw an imminent attack on Iran, they could rush to buy up oil futures. This would push up the futures price, which would lead producers to lower current output and devote more of their finite supply to the future (where the new demand was). The reduction in current supply would drive up the spot price, forcing consumers to economize on oil in the present.
Maybe High Prices Aren’t Such a Bad Thing
Let’s carry this scenario just a bit further. Suppose the speculators were really convinced that war with Iran would happen within a few months and that the price of oil at that time would skyrocket to $200 per barrel. Then the speculators would continue buying futures contracts, so long as the futures price were below $200. Oil producers would be overjoyed at this incredible demand, and would gladly sell more and more futures contracts. At some point, the producers would realize that they had promised as many barrels in future months as they could physically pump. Then it would become profitable to pump oil in the interim and physically warehouse it.
Thus the speculators’ actions would a) drive up the spot price of oil to cause consumers to restrict their use of oil in the present, and b) induce stockpiling of oil. Notice that these effects are exactly what we want to happen. If the speculators were right and war broke out, the spot price would not jump as sharply because it would have been pushed up already. The larger stockpiles of physical oil would help ease the crunch when Iran stopped exporting.
Pumping Out Evidence to the Contrary
To return to the Time article, the authors have spelled out a mechanism through which rich institutions could push up the price of oil. But they haven’t followed out the implications of their thesis and checked to see whether this was actually happening. Unfortunately for their claim, oil inventories have been fairly constant over the last several years, and—most damning of all—world oil production increased from 2007 through 2008, exactly the period when prices skyrocketed. (See my article “Oil Speculators: Bad or Good?” for more details.)
To repeat: Consumers still decide how many barrels they want to buy at a given price. If outside parties push up the price (and they can, if they are willing to risk enough money), then consumers will buy fewer barrels. Therefore, if the high price of oil were due to manipulation, we would observe either a restriction in output and/or accumulating inventories. We see neither.
In reality, all prices are determined by supply and demand, properly defined. Outside investors with lots of money can certainly influence prices, but there are always risks. Funds that had large “long” bets on commodities took a bath as oil fell from its July 2008 high of $145 down to well below $50 a few months later. Futures markets allow producers and consumers to hedge against needless risk by locking in prices, and they allow speculators with superior foresight to improve the allocation of resources over time. Our Time authors think they’ve shown that the oil market is rigged, but it just ain’t so!
Happy 150th, Oil! So Long, and Thanks for Modern Civilization -- From Wired Magazine, August 28th 2009
One hundred and fifty years ago on Aug. 27, Colonel Edwin L. Drake sunk the very first commercial well that produced flowing petroleum.
The discovery that large amounts of oil could be found underground marked the beginning of a time during which this convenient fossil fuel became America’s dominant energy source.
But what began 150 years ago won’t last another 150 years — or even another 50. The era of cheap oil is ending, and with another energy transition upon us, we’ve got to scavenge all the lessons we can from its remarkable history.
“I would see this as less of an anniversary to note for celebration and more of an anniversary to note how far we’ve come and the serious moment that we’re at right now,” said Brian Black, an energy historian at Pennsylvania State University and and author of the book Petrolia. “Energy transitions happen and I argue that we’re in one right now and that we need to aggressively look to the future to what’s going to happen after petroleum.”
When Drake and others sunk their wells, there were no cars, no plastics, no chemical industry. Water power was the dominant industrial energy source. Steam engines burning coal were on the rise, but the nation’s energy system — unlike Great Britain’s — still used fossil fuels sparingly. The original role for oil was as an illuminant, not a motor fuel, which would come decades later.
Before the 1860s, petroleum was a well-known curiosity. People collected it with blankets or skimmed it off naturally occurring oil seeps. Occasionally they drank some of it as a medicine or rubbed it on aching joints.
Some people had the bright idea of distilling it to make fuel for lamps, but it was easier to get lamp fuel from pig fat or whale oil or converted coal. Without a steady supply, there was no point in developing a whole system and infrastructure dedicated to petroleum.
Nonetheless, some Yankee capitalists from Connecticut were convinced that oil could be found in the ground and exploited. They recruited “Colonel” Edwin Drake, who was not a Colonel at all, mostly because he was charming and unemployed. He, in turn, found someone skilled in the art of drilling, or what passed for it in those days.
Drake and his sidekick “Uncle Billy” Smith started looking underground for oil in the spring of ‘59. They used a heavy metal tip attached to a rope, sending it plummeting down the borehole like a ram to break up the rock. It was slow going.
On Aug. 27, 1859, at 69 feet of depth, Drake and Smith hit oil. It was a big deal, but the Civil War stalled the immediate development of the rock oil industry.
“When the discovery happened, the few people who were there and not involved in the war, went around and bought all the property they could and had outside investors come in,” Black said. “But the real heyday of the development happened from 1864-1870. It’s that 11-year period when the little river valley was the world’s leading supplier of oil.”
The “little river valley” in western Pennsylvania earned the nickname Petrolia. Centered in the Oil Creek valley about one hundred miles north of Pittsburgh, the wells of Pithole, Titusville and Oil City pumped 56 million barrels of oil out of the ground from 1859 to 1873.
Suddenly, rock oil was everywhere. And cheap. Whale oil had always been a bit precious. A three to five year voyage would only yield a few thousand gallons of the stuff. In 1866, after the end of the Civil War, 3.6 million barrels poured out of the region. Daniel Yergin notes in his history of oil, The Prize, that as more people poured into the oil regions “supply outran demand” and soon the whiskey barrels that held the oil “cost almost twice as much as the oil inside them.”
Still, fortunes were being made and lost. Not just money, but energy, was flowing from underground. Some have estimated that for every unit of energy you invested sinking a well, you got back “more than 100 times as much usable energy.
Oil, people soon found, was uniquely convenient. To equal get the amount of energy in a tank of gasoline, you need 200 pounds of wood. Pair that energy density with stability under most conditions (meaning it didn’t randomly explode), and that, as a liquid, it was easy to transport, and you have the killer app for the infrastructure age.
In a world that only had a tiny fraction of the amount of heat, light, and power available that we do now, people came up with all kinds of ideas for what to do with oil’s energy: cars, tractors, airplanes, chemicals, fertilizer, and plastic.
Perhaps it’s not a surprising consequence of this innovation that at current consumption levels, Americans would blow through all the oil ever produced in Petrolia in less than three days.
The scale of the oil industry is astounding, but it’s becoming clear the world’s oil supply will peak soon, or perhaps has peaked already. People quibble about the details, but no one argues that oil will play a much different role in our energy system in 50 years than it did in 1959.
The search for alternatives is on. If that search goes poorly — as some Peak Oil analysts predict — human civilization will fall off an energy cliff. The amount of energy we get back from drilling oil wells in the middle of the Gulf of Mexico continues to drop, and alternative sources don’t provide usable energy for humans on the generous terms that oil long has.
But humans with an economic incentive to be optimistic become optimists, and the harder we look, the more possible alternatives we find. The big question now is whether the cure for our oil addiction will come with a heavy carbon side effect.
“Peak oil and peak gas and coal could really go either way for the climate,” Pushker Kharecha, a scientist with NASA’s Global Institute for Space Studies, said at least year’s American Geophysical Union meeting. “It all depends on choices for subsequent energy sources.”
Over the next 20 years, synthetic fuels made from coal or shale oil could conceivably become the fuels of the future. On the other hand, so could advanced biofuels from cellulosic ethanol or algae. Or the era of fuel could end and electric vehicles could be deployed in mass, at least in rich countries.
With the massive injection of stimulus and venture capital money into alternative energy that’s occurred over the past few years, the solutions for replacing oil could already be circulating among the labs and office parks of the country. To paraphrase technology pundit Clay Shirky talking about the media, nothing will work to replace oil, but everything might.
If history tells us anything, it’s that energy sources can change, never tomorrow, but always some day.
“What is required is to operate without fear and to take energy transitions on as a developmental opportunity,” Black said.
Swings in Price of Oil Hobble Forecasting - from the NY Times
The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.
In Vienna, the Czech industry minister, Vladimir Tosovsky, left, and OPEC’s president, José Maria Botelho de Vasconcelos. The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.
A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55 percent since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.
“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”
Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York. At the close of last week’s trading, oil futures fell $2.58, to $66.73 a barrel, after rising above $72 a barrel last month.
These gyrations have rippled across the economy. The automakers General Motors and Chrysler have been forced into bankruptcy as customers shun their gas guzzlers. Airlines are on pace for another year of deep losses because of rising jet fuel costs.
And households, already crimped by falling home prices, mounting job losses and credit pressures, are once more forced to monitor their discretionary spending as energy prices rise.
While the movements in the oil markets have been similar to swings in most asset classes, including stocks and other commodities, the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.
Government officials around the world have become concerned about a possible replay of last year’s surge. Energy officials from the European Union and OPEC, meeting in Vienna last month, said that “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated” without more oversight.
Many factors that pushed oil prices up last year have returned. Supply fears are creeping back into the market, with a new round of violence in Nigeria’s oil-rich Niger Delta crimping production. And there are increasing fears that the political instability in Iran could spill over onto the oil market, potentially hampering the country’s exports.
The OPEC cartel has also been remarkably successful in reining in production in recent months to keep prices from falling. Even as prices recovered, members of the Organization of the Petroleum Exporting Countries have been unwilling to open their taps.
Top officials said that OPEC’s goal was to achieve $75 a barrel oil by the end of the year, a target that has been endorsed by Saudi Arabia, the group’s kingpin.
“Neither the organization, nor its key members, has any real interest in halting the rise in oil prices,” said a report by the Center for Global Energy Studies, a consulting group in London founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister.
But unlike last year, when the economy was still not in recession and demand for commodities was strong, the world today is mired in its worst slump in over half a century. The World Bank warned the recession would be deeper than previously thought and said any recovery next year would be subdued.
The International Energy Agency held out the prospect that energy demand was unlikely to recover before 2014. Yet the indicators that would traditionally signal lower prices — like high oil inventories or OPEC’s large spare production capacity — do not seem to hold much weight today, analysts said.
“Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” Deutsche Bank analysts said in a recent report.
Investors are betting that the worst of the economic slump may be coming to an end, and are bidding up what they perceive will become scare resources once demand kicks back again, analysts said. This uncertainty is making it difficult for companies to plan ahead, they said.
“People do not like that kind of volatility, they want to know what their costs are going to be,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group.
For the global airline industry, the latest price surge is certain to translate into more losses this year, according to the industry’s trade group, I.A.T.A. Airlines are expected to post losses of $9 billion this year, following last year’s losses of $10.4 billion. “Airlines have not yet felt the full impact of this oil price rise,” according to I.A.T.A.’s latest report.
At Southwest Airlines, for example, fuel accounts for about a third of the company’s costs, according to Ms. Wright, the chief financial officer. The experience of the past year, she said, “has convinced us we cannot afford to not be hedged.”
The company has currently hedged part of its fuel use for the second half of the year at $71 a barrel, and for 2010 at $77 a barrel. Hedging acts as an insurance policy if prices rise above these levels.
But last year, Southwest reported two consecutive quarters of losses, as prices spiked and collapsed — all within a few months. “Prices were falling faster than we could de-hedge,” Ms. Wright said.
To survive the slump, many airlines have cut routes and raised both fares and fees, like charging for luggage, while some of the industry’s top players have merged. For example, Delta Air Lines bought Northwest Airlines last year, and in Europe, Lufthansa of Germany bought Austrian Airlines and Air France-KLM acquired Alitalia of Italy.
Likewise, automobile showrooms emptied out as gasoline prices rose, forcing General Motors and Chrysler to cut production sharply as they wade through bankruptcy. Meanwhile, they are under pressure from Washington to improve their fuel ratings.
“Do not believe for an instant that sport utilities are making a comeback,” George Pipas, Ford’s chief sales analyst, told reporters last week.
But to Jeroen van der Veer, who retired as chief executive officer of Royal Dutch Shell last week, prices are increasingly dictated by long-term assessments of supply and demand, rather than current market fundamentals. He advised taking a long-term view of the market.
“Oil has never been very stable,” Mr. van der Veer said. “If you look at history, you have to expect more volatility.”
In Vienna, the Czech industry minister, Vladimir Tosovsky, left, and OPEC’s president, José Maria Botelho de Vasconcelos. The instability of oil and gas prices is puzzling government officials and policy analysts, who fear it could jeopardize a global recovery. It is also hobbling businesses and consumers, who are already facing the effects of a stinging recession, as they try in vain to guess where prices will be a year from now — or even next month.
A wild run on the oil markets has occurred in the last 12 months. Last summer, prices surged to a record high above $145 a barrel, driving up gasoline prices to well over $4 a gallon. As the global economy faltered, oil tumbled to $33 a barrel in December. But oil has risen 55 percent since the beginning of the year, to $70 a barrel, pushing gas prices up again to $2.60 a gallon, according to AAA, the automobile club.
“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”
Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York. At the close of last week’s trading, oil futures fell $2.58, to $66.73 a barrel, after rising above $72 a barrel last month.
These gyrations have rippled across the economy. The automakers General Motors and Chrysler have been forced into bankruptcy as customers shun their gas guzzlers. Airlines are on pace for another year of deep losses because of rising jet fuel costs.
And households, already crimped by falling home prices, mounting job losses and credit pressures, are once more forced to monitor their discretionary spending as energy prices rise.
While the movements in the oil markets have been similar to swings in most asset classes, including stocks and other commodities, the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.
Government officials around the world have become concerned about a possible replay of last year’s surge. Energy officials from the European Union and OPEC, meeting in Vienna last month, said that “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated” without more oversight.
Many factors that pushed oil prices up last year have returned. Supply fears are creeping back into the market, with a new round of violence in Nigeria’s oil-rich Niger Delta crimping production. And there are increasing fears that the political instability in Iran could spill over onto the oil market, potentially hampering the country’s exports.
The OPEC cartel has also been remarkably successful in reining in production in recent months to keep prices from falling. Even as prices recovered, members of the Organization of the Petroleum Exporting Countries have been unwilling to open their taps.
Top officials said that OPEC’s goal was to achieve $75 a barrel oil by the end of the year, a target that has been endorsed by Saudi Arabia, the group’s kingpin.
“Neither the organization, nor its key members, has any real interest in halting the rise in oil prices,” said a report by the Center for Global Energy Studies, a consulting group in London founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister.
But unlike last year, when the economy was still not in recession and demand for commodities was strong, the world today is mired in its worst slump in over half a century. The World Bank warned the recession would be deeper than previously thought and said any recovery next year would be subdued.
The International Energy Agency held out the prospect that energy demand was unlikely to recover before 2014. Yet the indicators that would traditionally signal lower prices — like high oil inventories or OPEC’s large spare production capacity — do not seem to hold much weight today, analysts said.
“Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” Deutsche Bank analysts said in a recent report.
Investors are betting that the worst of the economic slump may be coming to an end, and are bidding up what they perceive will become scare resources once demand kicks back again, analysts said. This uncertainty is making it difficult for companies to plan ahead, they said.
“People do not like that kind of volatility, they want to know what their costs are going to be,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group.
For the global airline industry, the latest price surge is certain to translate into more losses this year, according to the industry’s trade group, I.A.T.A. Airlines are expected to post losses of $9 billion this year, following last year’s losses of $10.4 billion. “Airlines have not yet felt the full impact of this oil price rise,” according to I.A.T.A.’s latest report.
At Southwest Airlines, for example, fuel accounts for about a third of the company’s costs, according to Ms. Wright, the chief financial officer. The experience of the past year, she said, “has convinced us we cannot afford to not be hedged.”
The company has currently hedged part of its fuel use for the second half of the year at $71 a barrel, and for 2010 at $77 a barrel. Hedging acts as an insurance policy if prices rise above these levels.
But last year, Southwest reported two consecutive quarters of losses, as prices spiked and collapsed — all within a few months. “Prices were falling faster than we could de-hedge,” Ms. Wright said.
To survive the slump, many airlines have cut routes and raised both fares and fees, like charging for luggage, while some of the industry’s top players have merged. For example, Delta Air Lines bought Northwest Airlines last year, and in Europe, Lufthansa of Germany bought Austrian Airlines and Air France-KLM acquired Alitalia of Italy.
Likewise, automobile showrooms emptied out as gasoline prices rose, forcing General Motors and Chrysler to cut production sharply as they wade through bankruptcy. Meanwhile, they are under pressure from Washington to improve their fuel ratings.
“Do not believe for an instant that sport utilities are making a comeback,” George Pipas, Ford’s chief sales analyst, told reporters last week.
But to Jeroen van der Veer, who retired as chief executive officer of Royal Dutch Shell last week, prices are increasingly dictated by long-term assessments of supply and demand, rather than current market fundamentals. He advised taking a long-term view of the market.
“Oil has never been very stable,” Mr. van der Veer said. “If you look at history, you have to expect more volatility.”
Exploring for domestic oil would be a win-win for all, even environmentalists
This is a list of some of the significant benefits that would be achieved by so doing.
1. Lower energy costs brought about by increased domestic supply. Estimated $10 to $20 crisis premium — 25 cents to 50 cents per gallon — in today's oil price ould disappear. You should no longer have the cost and pollution resulting from shipping oil and gas from the Middle East.
2. Lower food costs. There would be less diversion of corn into ethanol, resulting in lower corn prices, hence lower food prices. No need for 41-cents-a-gallon subsidy to ethanol producers.
3. Creation of tens of thousands of high-paying jobs from domestic oil exploration and production. That number would be increased many times, if you include structural and service jobs that resulted.
4. Removing the disadvantage American industry faces from high energy costs, preserving many jobs, especially in areas using natural gas as feedstock, such as chemical and plastics.
5. Tax revenue from sale of leases, production royalties, payroll taxes and corporate income taxes.
6. Reduce federal budget deficit.
7. Reduce our foreign trade deficit. Petroleum products are one of our largest imports.
This is a win/win for everyone, including environmentalists.
1. Lower energy costs brought about by increased domestic supply. Estimated $10 to $20 crisis premium — 25 cents to 50 cents per gallon — in today's oil price ould disappear. You should no longer have the cost and pollution resulting from shipping oil and gas from the Middle East.
2. Lower food costs. There would be less diversion of corn into ethanol, resulting in lower corn prices, hence lower food prices. No need for 41-cents-a-gallon subsidy to ethanol producers.
3. Creation of tens of thousands of high-paying jobs from domestic oil exploration and production. That number would be increased many times, if you include structural and service jobs that resulted.
4. Removing the disadvantage American industry faces from high energy costs, preserving many jobs, especially in areas using natural gas as feedstock, such as chemical and plastics.
5. Tax revenue from sale of leases, production royalties, payroll taxes and corporate income taxes.
6. Reduce federal budget deficit.
7. Reduce our foreign trade deficit. Petroleum products are one of our largest imports.
This is a win/win for everyone, including environmentalists.
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