Earlier this week I spoke to Jeff Rubin, former chief economist at CIBC and one of the most mainstream of the economists who believe in peak oil (in that he believes conventional oil production has peaked). He’s recently had a book published called ‘Your world is about to get a whole lot smaller’, about globalisation in the age of energy scarcity. Following is an extract of our conversation:
What do you think the oil price rise to now $68 will mean for economic recovery?
I think we’ll see a return to triple digit prices very early into an economic recovery, probably within 12 months of that recovery being under way, and I guess the issue is going to be: will the return to triple digit oil prices lead us right back into recession? Because I think triple-digit oil prices have played a much larger role in the global recession than it’s yet been given credit for.
If that is the case, will a future rendez-vous with triple digit oil lead to a similar result?
Monday marked the official start of oil exports from Iraq’s Kurdistan region, celebrated by a ceremony complete with strobe lights and a musical score.
For investors who have attempted to follow the byzantine politics leading up to this event, Monday might have appeared the breakthrough that has been anticipated for a long time, after lengthy tussling between Iraq’s central government and the Kurdistan Regional Government over who had the right to authorise exports, and under what terms.
Except for the payment problem.
On Energy Source:
Oil and gas prices: Why have they diverged, and when will it end?
Don’t just blame the oil market speculators
Markets: Oil slips ahead of EIA data
Crude inventories expected to fall by 1.4m bbl
Canadian oil sands: Falling costs kick in, just as prices rise
Nice timing – perhaps
Opec economist wary of steep oil price rise
Qabazard says prices may fall back
Hamilton on speculation, inflation and oil
The many factors at play
World’s next big Kyoto pact begins to take shape What this week’s meetings in Bonn mean (Christian Science Monitor)
Todd Stern on US climate change position Interview with the US negotiator (BBC)
EU says climate policy will boost jobs 20% renewables goal could create 410,000 jobs by 2020 (Green Inc/NY Times)
Nicholas Stern’s heresy: Conceding the west’s climate burden The producers-vs-consumers debate grinds on (Grist)
Will Volvo’s 2012 plug-in hybrid also be a diesel? It looks like it (CNet)
Hot rock power scheme could brew trouble in Eden Geothermal not as good (or safe) as it sounds (NewScientist)
Crude conversations: Obama, Saudi Arabia and US oil imports US dependence on Saudi oil ain’t what it used to be (Environmental Capital/WSJ)
As oil prices have raced ahead in the past few weeks, more than doubling from their low point below $33 per barrel in February, the behaviour of natural gas prices is puzzling.
Or, looked at another way, it is oil prices that are puzzling and gas prices that are easily explicable. Demand for both oil and gas is weak. Inventories for both oil and gas are high, in the US and elsewhere. In that environment, you would really expect prices to be falling.
In fact, while oil has been surging ahead, gas has been languishing. This is the chart for the US:
The red line is WTI, US crude, the blue is the Henry Hub gas price, which tracked oil pretty closely during the upswing to the peak last summer, and during the downturn through to February this year. Since then, however, the two lines have parted.
So why the divergence?
We’ve been hearing for some time that input costs for oil production will begin to follow oil prices downwards – and oil services companies such as Schlumberger laying off staff certainly supported that. However it has cost savings haven’t become apparent very quickly, mostly because of existing contracts that were set at higher prices than the current oil prices. BP in late April it had seen costs fall 11 per cent, and now Shell says it is seeing signs of cheaper services now.
“As far as projects are concerned and normal operating costs, we see a
lot of our renegotiations … enter with lower costs at this moment,” Chief
Executive Jeroen van der Veer said on the sidelines of an industry conference in
More interestingly, the vast Canadian oil sands reserves, which suffered a big fall in investment as oil prices fell too low to support the expensive extraction process required, might be back in play.
Oil prices slipped on Wednesday ahead of the latest US weekly inventories data while base metals were mixed and gold consolidated around the $980 an ounce level.
In oil markets, Nymex July West Texas Intermediate slipped 53 cents to $68.02 a barrel while ICE July Brent lost 40 cents at $67.77 a barrel.
The US summer driving season has started and government inventory data, due for release later in the session, were expected to show a fall of 1.4m barrels in crude stocks and an increase of 400,000 barrels in petrol inventories, according to a poll of analysts by Reuters.
Nymex RBOB July unleaded gasoline traded fractionally weaker at $1.9176 a gallon.
Refinery utilisation was forecast to increase 0.5 percentage points to 85.6 per cent as refineries continued to step up activity to meet rising demand.
Read the full commodities report on FT.com
A difference of opinion among Opec members on the cause of the recent oil price rises was evident at the cartel’s meeting in Vienna last week, with Saudi oil minister Ali Naimi was positive about the world economy, while some of his fellow Opec members, such as Chakib Khelil, Algeria’s oil minister, were speaking more warily about whether it was fueled by speculators.
Opec’s chief economist, Hassan Qabazard, told the National Oil Companies Congress in Abu Dhabi yesterday that it ‘non-fundamentals’ were a bigger driver than fundamental – and that prices might fall again as a result.
Platts reported (emphasis ours):
“I think personally prices for the fundamentals that we see today are quite high and that is due to the inflow of investment funds into the market…we see much more long positions by investors now in the market who
are expecting a higher price,” he said.
Asked whether this meant markets were set for a fall as a result of this activity, Qabazard replied: “They might. They are going up too fast…they are rallying the price up too fast,” he said.
Qabazard also pointed to the 200m barrel overhang in OECD stocks and 130m barrels of oil in floating storage; although he said this was expected “to be eaten up” by the end of this year, depending on demand.
Opec says oil price rally too fast, may fall on fundamentals (Platts, 02/05/09)
Opec ministers divided: fundamentals, or a bubble? (FT, 28/05/09)
Opec bets on recovery to boost price (FT, 29/05/09)
On Monday we wrote that the rise in oil prices, so far, was not in the range thought to risk threatening an economic recovery. James Hamilton, who wrote the most complete and influential study on evidence that high oil prices helped put the US into recession in late 2007, also noticed the price rise. And he doesn’t seem concerned with $65+ oil either.
Hamilton is more concerned with the reverse question, which is just as interesting (and a little more immediate): whether the rising oil prices signal an economic recovery:
He points out that much of the ‘recovery’ that is being talked about now is in the developing world; while oil consumption and GDP in developed countries is still in the doldrums.
He also sees a big role of inventories. Dave Cohen over at the US Peak Oil Association, who in a perhaps contrarian way points out that the vast amounts of stored oil – including floating at sea in tankers – will at some point be dumped back on the market by physical traders. Hamilton writes:
The graph below plots the behavior of U.S. crude oil inventories over a typical year, along with what actually happened in 2008 and so far in 2009. The fact that inventories were significantly below average in the first half of 2008 is one of the indicators to me that you can’t attribute the whole run-up at the time to speculation.
Hamilton points out that being long in commodities might be one way to hedge against inflation if you believe, as he (among others) does, that inflation is set to rise.
Supply, demand and the price of oil (Econbrowser)
Are oil prices threatening the world economy already? (FT Energy Source, 01/06/09)
- Hurricane season finds energy groups unready
Gulf of Mexico energy companies are taking a big risk (FT)
Utilities would take worst financial hit with US CO2 bill: Study
Risks would vary widely between companies (Platts)
- BP ends final pay pension for new staff
BP was one of the last remaining FTSE 100 groups to offer final salary pensions (FT)
- Lombard: BP’s long-lived pensioners pose a problem for all
The issue of longevity bonds by the UK government would help (FT)
- Meralco owners face hurdles to power revival
Investors are watching for fresh signs of hostilities to erupt (FT)
- Centrica to buy stake from Canadian Superior Energy
Owner of British Gas to invest almost £500m in Trinidad (FT)
- India’s Tata Power plans gas-based plants
This will be the first time of the Tata’s (HT)
- Shell sees Iraq moving swiftly to first oil bid round awards
Shell’s chief positive about future of war torn country (Platts)
- Wood is new coal as polluters use carbon-eating trees
Wood is becoming a hot commodity in a new low-carbon world (Bloomberg)