May 23, 2008 | posted by Michael Baxter in Oil | comments (0) |

Oil is through the roof, even the IEA is puzzled, and the peak oil theory is back in the headlines.

But we still say this is a bubble – see yesterday’s article – besides, only bubbles can explain sudden spikes like the ones we are seeing at present.

Mind you, we should be learning our lesson now, and turning our attention to the real ray of hope – the sun.

Now the Paris-based International Energy Agency (IEA) has really set the alarms ringing.

Yesterday, Fatih Birol, the chief economist there, said, “But what has happened in the last few years has not been in line with economic theory. The price of oil went up sharply between 2004 and 2006 and demand actually increased. That may seem bizarre but it is the result of new buyers coming in, such as China and the Middle Eastern economies where fuel is subsidised by government and rises are not reflected on the consumer side.”

So, it is all down to too much demand then?

Mind you, this morning, the Independent led with an article asking whether we are running out of black gold.

Yet there is supposedly more oil lurking in the tar sands of Alberta Canada than has ever been found, anywhere in the world to date.

We will run out of oil one day, but it seems that since investment into exploration has been so low over recent years it is far too hasty to say that time is imminent.

Mind you, the longer oil stays up, the more likely it is we will develop alternatives that really will be cheaper in the long run.

Recently, Scientific American magazine ran an article suggesting that by 2050 solar energy will provide sufficient power so that the US will be completely free of foreign oil.

The Scientific American article said that the energy in sunlight striking the earth for 40 minutes is the equivalent of global energy consumption for a year.

The real scandal though is that it is taking so long to exploit this resource.

But these days, technology is changing so fast, all technological industries seem to obey rules just like Moore’s Law.

The potential not only to tap into this vast solar resource, but to do so quickly, is there.    The greater the investment, the faster will be the rate of technological progress, and the sooner will come the time when the resource can be exploited rapidly and cheaply.

Trouble is, governments must be willing to think 10 or more years ahead.

May 22, 2008 | posted by Michael Baxter in Oil | comments (1) |

The oil debate rumbles on.    Yesterday saw the release of the latest set of minutes from the Bank of England.  The recent inflation report from the Bank made the release of these minutes almost irrelevant.  We already knew it was worried about inflation, but that MPC member David Blanchflower wants to see rates slashed and the minutes just confirmed this – with the voting going 8-1 for rates staying on hold.  

But the really interesting bit was this paragraph:  “Speculative purchases did not seem to be the prime cause of the recent increases in the oil price. More fundamental demand and supply factors had probably been at the root of its steep rise during recent months and there remained considerable uncertainty about the oil price outlook.”

Meanwhile, in the US, oil company bosses were hauled up in front of Congress.

And the Senators roared their displeasure.    Top of the pride was Sen. Richard Durbin, D-Ill who said, “You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession…Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”

To which the oil chiefs said, “Hey, it’s not our fault, blame the Arabs – oh, and those environmentalists, blame them too… and the Chinese.”

Well, actually, they put it more diplomatically than that.

Robert Malone, who is both chairman and president of BP America Inc., said, “Today’s high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation.”

John Hofmeister, president of Shell. put it this way: “The market is squeezed by exporting nations managing demand for their own interest [that’s the blame the Arabs bit] and other nations subsidizing prices to encourage economic growth [and that’s the Chinese].

Meanwhile, others said that if only they had been allowed to drill in Alaska and the Rocky Mountains, then there would be plenty of supply.

It seems that everyone is looking for someone to blame.

There is now a growing feeling that consumers of oil need to get together and negotiate in one block with OPEC.     And judging by comments we reported on yesterday, that includes the Chinese. 

In truth, though, we are seeing the grindings of an ancient wheel. Take as an example of this wheel the Arctic hares and lynxes.

In his book, Why Most Things Fail, Paul Ormerod told the story of how statisticians in Hudson Bay had observed a regular cycle in the population of these two species.   Further study revealed that when the population of hares in the region was high, the lynx thrived and its populace increased in size rapidly, until the predators were consuming hares faster than their long-eared prey was able to reproduce.  As a result a shortage of hares followed, and a greater effort was required by each lynx to catch its dinner.  In time, mass starvation of the lynx occurred, and its population fell rapidly, the hares then found little impediment to their own struggle for survival, until eventuality the cycle repeated itself.

The mistake these two creatures were making was that they were not seeing the big picture.    Each boom caused the next slowdown because they failed to take into account that the actions of individual hares and lynxes were being duplicated across the entire population.

Throughout the 1990s, oil was cheap – very cheap.   As a result, investment into oil exploration was low.    But, more seriously than that, investment into finding alternatives was low too.    The US buried its head in the sand over global warming – development of solar, wind, wave and tide power was held back.

Forget about fears over climate change, renewables only really hit centre stage when oil rose above $50 or so.

The period of cheap oil encouraged the use of those great big gas guzzlers we see on the roads – the SUVs.

This is changing. A couple of years ago, if you drove around in a 4-by-4 it  said this about you: that you were rich and successful. But now attitudes seem to be changing, and the perception of 4-by-4 is changing.   The likes of Jeremy Clarkson with their enthusiasm for burning rubber and noisy engines, seem a little passé.

In the US this change of attitude has manifested itself in the success of Toyota and the decline of GM, Ford and Chrysler.

When economists look at historical trends they often seem to forget how new things are.  Sure we can trace the price of oil back over 100 years now, but actually the world has changed so much over that period, that it seems unlikely there are many lessons to be drawn today on how oil behaved in the past.

The current pressures that are pushing up the price of oil are different to those that were in place in the 1970s.

But human nature and the laws of economics do not change.  Oil at $130 a barrel is simply unaffordable.   Countries which subsidise their oil will soon find this is just too expensive.

The only way oil will remain at current levels will be if the global supply of money expands and inflation soars – globally.

And the jury is still out on whether that is a real fear.

May 21, 2008 | posted by Michael Baxter in Oil | comments (0) |

To you and me it will soon be summertime, but for oil analysts it’s got another name: the driving season.

It is that time of the year when Americans jump into their massive road wagons, fill up the tank with petrol and hit the road, drinking up gas as hundreds of miles of tarmac disappear behind them. At least that is how it used to be.

As a result, this is a time of the year when oil often goes up in price.         Oil is like that, it follows the seasons. There’s the driving season, and then the hurricane season, then things tend to go quiet, providing that there isn’t a war against terror season, until the following year.

But of late, oil has been no respecter of these conventions.    One day it seems to go up in price for no better reason than  it’s Monday, and then the following day it rises because, well, because it was Tuesday.

Yesterday it was one of those Tuesday-driven oil hikes – but it was enough: enough to push oil all the way up to $129 a barrel, yet another all-time high.    But here is the real worry: today is Wednesday, will those mid-week blues send oil over the $130 mark for the first time ever?

Well, actually, additional reasons were given for the latest hike.    The latest news came from OPEC, when it said it was not planning any supplementary meeting to discuss rising oil output, so that means the next meeting won’t be until September. 

But then the other day, Saudi Arabia said it was upping output by 300,000 barrels a day – but even then the price went up.

It seems that if the news is good oil goes up in price, if it is bad it goes up too. 

The Chinese earthquake has also been cited as a reason for oil going up, as damage to local hydro-electricity energy plants will lead to a shortage of home-grown energy.

Yesterday also saw the revelation of the news that the US was now importing less oil than before. According to the US Department of Energy, US oil imports as a percentage of total consumption are expected to fall from 60 to 50 per cent by 2015, before then rising to 54 per cent in 2030.

So the US is trying its hardest to break its addiction to oil, and as it emerges that it is having some success, oil shoots up in price.   Does that remind you of anything?

Of course, a raft of reports have been published predicting oil will rise.  One moment headlines are made with a prediction of oil at $146, then it’s $150, and now the latest is saying $200 a barrel.  

No doubt these stories are right, and oil has got much further to rise in the SHORT-RUN.  

The oil bandwagon is getting busy too.  Yesterday, Norman Baker, the Liberal Democrats’ shadow transport secretary slammed government transport policy because it was based on the assumption oil will be trading at half the current price at the end of the next decade.  “It is absurd to assume that the price of oil will be $70 a barrel in 2020. Nobody outside the government thinks that will be the case,” he said.

Clearly, then, the Lib Dems are experts on commodities – it will be interesting to get their view on the FTSE 100 in 2020.

Right now, oil is far too expensive.  People just can’t afford it.    Alternatives will be found, fuel-efficient cars will become ever more popular, true renewable energy (not that bio-fuel nonsense) – solar, wind, wave and tide – will become more efficient.

If oil is anything like $200 in 2020 – in current prices that is, then we will have messed up energy policy big time.  

May 7, 2008 | posted by Michael Baxter in Oil | comments (1) |

Oil hit yet another all-time high yesterday, but could it come a-tumbling down?    There are reasons to think it may, and this is why:

Goldman Sachs put the cat amongst the pigeons yesterday when it warned oil could hit $200 a barrel within two years.  But another analyst, at Citigroup Inc, said oil could just as easily fall to $40. 

So who is right?  Well, maybe both.

Just before the cat sat down to its meal of pigeon, Arjun Murti, at Goldman Sachs, talked about  a “super spike,” in the price of oil.  But that word spike implies sharp rises before, and a big fall afterwards.  And that is precisely what Mr Murti meant.  He was saying that at $200 or so a barrel, demand for oil would fall rapidly, forcing the price down.

There are good underlying economic factors behind the rising price of oil, but some of the factors that have pushed it up are decidedly dodgy.       Demand is rising faster than supply – that’s the reason that makes sense.  But oil is also being pushed thanks to speculation, lack of refinery infrastructure and of course fears relating to terrorism.

Others argue there is another reason for the high price. Until a few years ago, oil was much, much lower in price – less than $20, and at that level investment was low.     These same people suggest that in time, with oil at $100 plus, this will change. 

This is the stuff natural business cycles are made of.   It really lies with the lemming behaviour of oil producers.     Oil is high in price so they all rush in, spend money on exploration, until supply exceeds demand.

The thing is though, this time producers seem to be wise to that, which is why OPEC has been reluctant to allow output to rise.       It does not want to see a repeat of the age old cycle – and when producers act in unison, presumably they can take measures to stop the cycle.

But that argument is based on the belief that demand for oil is unaffected by price – it’s what’s called elasticity of demand.  In the short-term, demand for oil is inelastic.  It does not seem to matter what the price is, demand is the same.     It was like that in the 1970s too.

But eventually, demand for oil did fall.  The speed limit in the US was reduced to 50 miles per hour, cars became more fuel-efficient, and then price fell.

In the long term, it appears the demand for oil is elastic, after all.

If oil really does reach $200, then the implications for the global economy will be serious, very serious.    Global recession may well be the result – demand will fall, price will plummet, and the next economic cycle will begin.

Then again, this does rather suggest global economic growth in the future may be constrained by the supply of oil.  That limitation in supply will always get in the way of too many years of growth.

That is until alternatives to oil are found. The short-term fix is no fix at all. Bio-fuel as it currently stands is a no-starter – it is inefficient, and its development has led to disturbing rises in the price of food.

But there are other alternatives, and the longer oil is priced north of $100 the quicker these alternatives will be developed.

The search for renewable energy has been held back by a flaw in the way the free markets operate.     It only makes sense for price to be determined by demand and supply when producers bear the full cost of supply.  

With pollution, producers do not pay the full cost of supply – the cost is instead paid by everyone, and, therefore, the price mechanism is inefficient.  Economic theory says the answer is a tax on oil – but, as Gordon Brown will tell you, this is controversial.

The development of  renewable forms of energy has surely been held back because producers of fossil fuels do not pay the full cost of production and governments lack the mettle, or even the understanding, to tax accordingly.

But, for as long as oil is priced north of $100 these alternatives will be developed – and that is why oil will fall right back down again – eventually.

April 16, 2008 | posted by Michael Baxter in Oil | comments (4) |

Has Brazil made the biggest oil find in 30 years, is this the end of peak oil?

Peak Oil is one of the most important theories currently being debated.     The idea goes like this, we will reach a time when global oil production will start to fall, never to rise again.  That time, say the doomsters, is soon. 

This week more evidence was revealed to support this theory when Leonid Fedun, a bigwig at Lukoil, a massive Russian oil company, told the FT that he had concluded 2007 would see the highest level of oil production in Russia during the course of his lifetime.    He said that Russia, which is currently the second-largest oil producer, is going the way of Mexico and the North Sea, where oil supplies have started to dry up.

But others dismiss talk of peak oil.  It is scaremongering they say.     Yesterday, Capital Economics said, “The slowdown in [Russian] oil production growth is more likely a result of increased state intervention in the energy sector,” and went on to talk about its heavy-handed treatment of foreign partners.

Some even argue peak oil will never be reached, ever, because they believe that oil is not a fossil fuel. Oil, goes the argument, is constantly being created by natural forces that have nothing to do with living, or formerly living, things.

Maybe, though, peak oil is not the point. The day when oil production starts falling is less relevant than the day when oil production is less than demand.    Thanks to the development of China and India, demand for oil will continue to rise.     We all want to see an end to global poverty, but it seems likely that if this dream could one day be realised, then the result would be even-greater demand for oil.

So, even if the peak oil theory is wrong, it is still possible we won’t be able to produce enough of the black gold to go round.

Returning to the pessimists, they say there hasn’t been a major oil find in over two decades, and we are running out of the stuff, “we are all doomed.” Others retort that there are plenty of alternatives to oil, and that actually even if peak oil was close to being realised that is a good thing, as it will force us to use cleaner, renewable forms of energy.

But, in the match between the peak oilers and the oil bulls, Brazil has won a free kick for the bulls.   Earlier this week, Haroldo Lima, the head of Brazil’s National Oil Agency, could barely contain his excitement when he said a new oilfield has been found that could contain 33 billion barrels of oil.  This would make it the biggest find in 30 years, and the third-biggest oilfield in the world.

It’s the second big Brazilian oil find announced in recent months.  Last year we brought news of the Tupi field, which itself elicited great excitement when it was announced it could contain between 5 and 8 billion barrels of oil.

The largest oil find of the last twenty years was the Kashagan field of Kazakhstan’s Kashagan, with 12 billion barrels worth of oil.    So, if Mr Lima is right, the Brazilian find is very significant indeed.      To put this discovery in context, even North Sea oil only accounted for 17 billion barrels.

Mind you, the phrase “if Mr Lima is right” does carry added significance.     Not everyone in Brazil was as pleased as he was. 

The country’s President Luiz Inacio Lula da Silva described Mr Lima’s announcement as “improper”.  Apparently, Brazil’s president knew all about the oil find, but was waiting for confirmation.  Meanwhile, Petrobras, the state-owned oil company which will be charged with exploiting the field, said in a statement, “More-conclusive data on the potential of the discovery will only be known after the completion of further phases in the evaluation process.”

Even if the potential for this field is of the level suggested, it will be a monumental task to get at it all.   It is based 200 miles offshore in 8,000 feet of water.   Then again, Petrobras is known as something of a deep-water specialist.   But, it has been reported that oil will need to stay at $60 for it to be viable to exploit the field.   And maybe that is the point. 

You may know, there are supposed to be even more billions of barrels of oil lurking in the tar sands of Alberta, Canada, but until oil went over $50 or so a barrel, it was thought that the oil would be too expensive to exploit.

If the price of oil was to fall, then many of the oil reserves with their vast potential would be uneconomic.   This would reduce expectations for oil production and the price would go up. 

Some critics of peak oil have also held the view that the price of oil would fall soon.  But it does seem you can’t have it both ways.  Sure, there’s lots of oil out there, and peak oil may yet prove to be a long way off, but only if the price remains high.

For as long as oil is priced north of $90, and incidentally it hit a new all-time high yesterday, closing in on $114, then alternatives to oil will become more and more attractive. 

Geneticist Carl Venter has talked about creating a microbe that feeds off carbon in the atmosphere, and generates methane as waste.      

Solar energy does of course create  massive potential, and ironically the most obvious places in the world where there seems to be an abundance of sun and land that could be turned into solar power farms, are the Middle East and North Africa.  So if oil at $100 a barrel encourages the development of solar power, then OPEC countries could be among the main beneficiaries.  But, the key with solar power, as indeed is the case for wind power, is storage.  The sun does not shine at night time, there are even occasions it is not windy in Britain.

So, for as long as oil is expensive, more money will be spent on learning how to exploit renewable energy.     Maybe, then, we will never reach peak oil, as the mechanism of supply and demand will ensure this never occurs.

But here is a theory you probably haven’t heard before. Maybe oil itself is renewable.

There is a theory, promoted by Thomas Gold, that oil and natural gas are produced in the depths of this planet.    This theory is supported by suggestions there is evidence of oil on the moons of Jupiter and Saturn. The argument then adds, this explains why we find oil in such out-of-the-way places, where life surely had never existed in abundance.

This theory may smack a little of being a tad crackpotish, but it turns out that what is called the abiotic oil theory has long been taken seriously in Russia.  Apparently, oil has even been found in the Caspian Sea region using the science of this theory.

If this theory is true then it is highly significant, but it is controversial, and not yet taken seriously in mainstream Western science.

But peak oil is, and remains, a complex area. Those who say they know the answer are simply deluding themselves.       
 
But what is not open to debate is this. If global economic growth is to continue, then in the absence of alternatives, demand for oil will rise too.     It is debatable whether oil production can keep up with demand, and even if it does, the oil exploited will be expensive, and only viable for as long as oil is like, black gold dust.

February 20, 2008 | posted by Michael Baxter in Oil | comments (0) |

The price of oil shot up again yesterday, at one point hitting a new all-time high, passing $100 – and yet, strangely, there doesn’t seem to have been a good reason.

There was a fire in a refinery in Texas over the weekend – that was bad, but then these things happen.

The second quarter of the year is typically a period of low demand for oil, and there were fears that OEPC may choose the occasion of its next meeting to cut oil supplies – but that does smack a tad of upside down logic. Think about it: the price of oil hits a new high, because traders think OPEC is worried demand will fall.

There has also been some sabre rattling going on between Venezuela and Exxon Mobile. Venezuela wants to nationalize an Exxon oil project. The oil company has managed to persuade some countries to freeze Venezuelan money sitting in their banks, while Venezuela itself is threatening to sue the oil company.

That all sounds pretty serious – but in reality it’s par for the course in this game.

The truth is, many economists have been predicting an imminent fall in oil for so long now that one assumes they must be beginning to question their own judgment.

Economic history is littered with examples of people who predicted a fall in a market, and for years looked foolish as their predictions seemed wrong – until eventually it all happened. Getting the timing right is nigh on impossible.

The most famous example of this is Sir Isaac Newton, who invested money in the South Sea investment craze, concluded the market was going to crash and pulled out, only to then count his folly – he reinvested just before the bubble burst and lost £20,000 – an awful lot of money for those days.

The most dangerous thing you can hear an investor say is, “Ah it’s a new paradigm now,” and so you have to say the evidence of history is behind those who say the price of oil will fall back, sooner or later.

Even so, every rule has its exception – and the fact is demand has reached unprecedented heights – and it seems likely to go on rising.

This may just be the occasion when a business cycle comes to an end. For so long, the oil industry has been characterised by the low price of oil leading to less exploration, leading to less supply, leading to higher price, leading to more exploration, leading to more oil and lower price, etcetera. But sooner or later we have known that no matter the level of investment, supply will permanently lag behind theoretical demand. Maybe that moment is upon us.

February 7, 2008 | posted by Michael Baxter in Oil | comments (0) |

One swallow doesn’t make a summer, but maybe there is room for optimism over the price of oil.

At the beginning of this year, it went within a whisker of $100, but ever since has gradually been falling. And this morning it was down to $86.96, the lowest level since the middle of October. (Price measures on the New York Mercantile Exchange.)

Okay, back in October we were all fretting about how high oil was, so don’t get too deliriously happy about the falls. But it is a good sign.

Even if oil stays at its current level, inflationary pressures will ease – that’s a good thing, and of course, the cheaper the oil, the better off we all feel, assuming your name isn’t Royal Dutch Shell, that is.

Apparently, in the US, oil inventory levels are now at their highest level in 14 years.

January 18, 2008 | posted by Michael Baxter in Oil | comments (0) |

There are two theories on oil doing the rounds at the moment. First you have the theory of peak oil, that’s the idea we are closing-in on the point when annual production of oil starts to fall. If there is any truth in this theory, then one would assume the price of oil will stay high, maybe rise.

The second theory is that, actually, there’s plenty of the black stuff out there – there is no crisis – and the price of oil is bound to fall soon.

Yesterday, a new report from Cambridge Energy Research Associates (CERA) in the US, came out decidedly against the peak ‘oilers.’

CERA put the boot into the theory of peak oil three times.

The first kick came with the revelation that the various studies saying the aggregate global decline rate among fields in production (FIP) is 8 per cent per year, were being far too pessimistic. Instead it says the decline is around 4 per cent. Furthermore, it says only 41 per cent of production is from fields in the database that are beyond the plateau stage and into the decline phase of their production lives. Finally, the third kick came with the news that annual field decline rates are not increasing but, as a result of increased investment, improved planning and technology, can be maintained at low decline rates in many fields for prolonged periods, and field life is very often longer than originally projected.

What’s the bottom line? CWERA says the results of this new study show “that liquids capacity of around 91 mbd in 2007 could climb to 112 mbd by 2017… this outlook is supported by a key conclusion of this study: there is no evidence that oilfield decline rates will increase suddenly.”

No Evidence of Precipitous Fall on Horizon for World Oil Production CERA

January 9, 2008 | posted by Michael Baxter in Oil | comments (0) |

It seems that there are two oil camps. Both accuse the other of being naive.

One camp says we are approaching peak oil and that permanently high oil prices are here to stay. They talk about demand caused by the growing economies of India and China, with their huge populations, and how demand for oil is set to rise an awful lot further. Then they talk about how there hasn’t been a truly major oil find since the 1970s, ergo, goes the argument, the price of oil will steadily rise, meaning that it will exert inflationary pressure for the foreseeable future.

Then there are those who scoff at that view. They say we have been here before, and with a sigh, remind us that previous warnings that oil was seeing permanent rises proved unfounded. After all, after surging in the 1970s and 1980s, oil fell right back down again to just $10 at the end of the last decade.

They say it’s a natural cycle, high oil prices leads to an increase in exploration, leads to more oil, leads to falls in prices, leads to less exploration, leads to high oil again.

And so far this year we have heard both sides of the debate. Capital Economics recently said speculative pressures mean that oil prices, “… can go into reverse very quickly. Oil is produced in some of the world’s least-stable regions, so it is easy to find reports of disruptions somewhere to explain any spike in prices. However, OPEC still has the capacity to increase supply to meet any routine shortfall. For now the cartel’s view is that underlying supply and demand conditions are nowhere near as tight as record oil prices would suggest. But if oil prices are still around $100pb in the run-up to the next OPEC meeting on 1st February, we would expect quotas to be raised again.”

But then earlier this week, India Oil Secretary M.S. Srinivasan said, “In the next two to three years we expect prices to reach $150 a barrel.”

And yet, as if to give weight to the other argument, added, “Given this scenario, we are putting in more efforts in our exploration and production.”

Two years ago, some economists scoffed at the idea of oil at $100 a barrel. This time last year those same economists were saying events were going to prove them right and that 2007 would see sharp falls in the black stuff.

Then again, as Alan Greenspan found when he warned of irrational exuberance and then changed his mind, it is very dangerous to believe that just because markets have not reacted the way they were expected to straight away, it doesn’t mean they won’t react that way eventually.

On the other hand, it is equally dangerous to say that just because the price of oil has always fallen in the past after hitting peaks, that it will happen again. After all, we will start running low on oil eventually, and the growth in demand at the moment really is extraordinary.

It seems oil will always follow the age-old pattern, until one day it stops following that pattern. That’s obvious, yet it seems that there is something hardwired into humans not to fully appreciate this basic truism.