January 2, 2008
$100 oil defies the economic outlook
US crude has touched $100 a barrel at last - well, just about, anyway - meaning that I have scored the first success in the FT’s predictions for 2008.
It was, of course, a very easy call to make: it was impossible to believe that there would not be some event sufficient to push a volatile oil price up the few extra dollars that it needed. As it has turned out, the assassination of Benazir Bhutto, fresh attacks in Nigeria and a weak Institute for Supply Management survey of US manufacturing have done the trick.
Behind those immediate factors, the underlying factors behind the strong oil price are well-rehearsed. Opec agreed cuts in its production in 2006 and those cuts held for much of last year, helped by the fact that some members such as Iran and Venezuela would have found it hard to increase production even if they had been allowed to. Non-Opec production has been deeply disappointing, partly as a hangover from the years of under-investment at the beginning of the decade, partly because mature areas such as the North Sea have been declining faster than expected, and partly because some oil-rich countries such as Russia have become less hospitable to foreign investment. At the same time, demand for oil in emerging economies, particularly China and the oil producers themselves, has grown strongly.
Yet while that combination of forces sent oil from $60 a year ago to $100 today, it is hard to see it being sustained, at a time when the outlook for the world economy, and in particular the US, is so troubling. China attracts the attention in terms of the oil market, because it is the biggest source of demand growth, but the consumption of China and India together is less than half that of North America. An important question for the oil market as the year wears on will be how far China can avoid the turbulence created by the economic problems of the US. Recession in the world’s biggest oil consumer plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil prices.
The only way you can realistically remain an oil bull and an economic bear - which is what the markets seem to be right now - is if you take a very negative view of the supply outlook, and the evidence to support such a view remains unconvincing. Today’s Lex column takes a timely pop at peak oil theorists, pointing out that while Marion Hubbert was right about the US, he was way off on his predictions of world output. The latest warnings about Opec’s long-run supply potential, published in Opec’s own review, are sobering, and suggest a future of tighter supplies and higher prices. But in the near term, it looks likely that demand for oil will take a hit - partly, of course, as a consequence of the high price - while supply is rising, and in the months to come we will see a retreat from $100.
It’s a drastic over simplification to say that, because Hubbert’s initial global projections were wrong, the end of cheap oil is not imminent. We are currently using up three or four barrels of oil for every barrel discovered yet you unquestioningly publish BP’s projection - which suggests that world reserves will implausibly remain undiminished despite rising depletion and falling discovery - for three more decades.
Hubbert’s significance is not that he correctly predicted the right date for the US oil production peak but because, after a long battle with the authorities, he proved that the official projection for US reserves/production (an identical curve to BP’s world chart) was wrong.
Does it not seem strange that the markets are happy on the one hand to dismiss decades of careful work on oil depletion theory as the work of a handful of loonies while simultaneously being so nervous about oil supplies that they will hike the cost of the world economy’s lifeblood by 3% overnight because of a few shots fired by some thugs in Nigeria?
Posted by: Half Empty | January 3rd, 2008 at 2:04 pm | Report this commentI would be glad to see some solid evidence presented which refutes the peak oil theory, but so far have seen none. This article cites a Lex column which refutes it merely by stating that Hubbert was wrong about world supplies. Was he wrong? It doesn’t look like it. There have been no major discoveries for 40 years. IMO, the attempts to slam peak oil makes it look like Lex is short oil. I see better arguments on message boards by people that are clearly trying to talk down the market.
Why is FT joining this game? Give us some real facts. Not hearsay.
Posted by: joe smith | January 3rd, 2008 at 3:50 pm | Report this commentLex uses the example of the recovery of oil from the oil sands as an argument about how economic forces change the equation in determining the eventual total in recoverable oil. However, recovering oil from the oil sands deposits requires large amounts of natural gas and water. It may be that the total amount of energy required to extract oil from the sands makes such recovery uneconomic in the long run, especially if natural gas becomes scarce. Additionally, heavy oil requires additional processing for use in eventual product and has a high sulfur content which makes it unsuitable if the prerogative is to reduce the amount of carbon released into the atmosphere. Why use clean burning natural gas to extract a dirty oil product? Lex’s argument is incoherent.
Posted by: Bill Goedecke | January 3rd, 2008 at 3:59 pm | Report this commentThe net supply of petroleum available for the world market is beginning to get squeezed. By focusing on production and reserves the key issue of how much oil is available to the market it completely missed. Those last few barrels available to the market set the price and their availablity is getting tighter and tighter.
In addition from a Peak Oil aware individuals perspective the price of oil in the short run is not my worry. The actual supply of oil over the coming decade is very much my concern. I will let the futures traders worry about today’s price and focus on a future of constrained supply instead while investing accordingly.
Posted by: Jim Hansen | January 3rd, 2008 at 6:32 pm | Report this commentSupply and demand can be trumped by speculation. As in the case of Aluminum the last two years, pure speculation “bids up” prices without regard to supply or demand. With the current condition of equities and the uncertain and certainly unsettled global financial markets, there are a lot of investment dollars looking for a home. If enough of them settle on oil futures, we could see a run-up in prices that could be sustained for many months.
Posted by: Ken Roberts | January 3rd, 2008 at 6:44 pm | Report this commentIt is obvious that supplies of various crude are tight .
In the past years , disruptions were brushed off or used for short speculative runs , but , in 2007 , in spite of a roaring world economy , the supply remainded essentialy flat while the price took off .
Posted by: jeannick | January 3rd, 2008 at 9:08 pm | Report this commentThe greatest of speculators (Livermore, Gann, to name a few) have always observed that deep, liquid markets will not go up sustainably unless they want to go up. I would avoid attributing price movements to pure speculation. Moreover, the market is never wrong — to argue the contrary is folly. It is time to face facts about the future of oil. It will probably not diminish significantly in price in our lifetimes.
I would be delighted to see some hard evidence to justify lower future oil prices. Peak oil detractors seem to rest their projections on hope, a human quality which serves no purpose in financial markets. The 80s and 90s are over!
Posted by: Matthew Sandretto | January 3rd, 2008 at 10:04 pm | Report this commentThe speculation over Peak Oil — the often bitter debate between proponents and detractors of the theory — gets its steam from the very fact that, like many studies in the hard sciences, nothing will likely be proven until we’re all dead.
I’ve recently found it more interesting to look at so-called plateau oil, an argument being made by the chairmen of some of the world’s biggest oil companies. The argument is that, quite apart from any truth to the notion of peak oil, the industry is constrained from producing much more oil than the approximately 87 million barrels it currently does. Perhaps production can rise another 20%, to 100 million barrels a day or so.
Given rapidly rising demand in India and China, that could have a constraining affect on the world economy.
Steve LeVine, author
Posted by: Steve LeVine | January 3rd, 2008 at 11:30 pm | Report this commentThe Oil and the Glory
http://www.oilandglory.com
I would second Steve LeVine’s point about the bitterness of the debate. Arguments rush in to fill the vacuum created by an absence of conclusive data. The reality of man-made global warming is a rather similar case. But as with climate change, as the evidence mounts the balance of probabilities shifts. And on what one might call the “strong” form of peak oil theory - that global oil output will hit a peak within, say, the next five years and decline steadily thereafter - the weight of evidence is largely against it. That does not mean, of course, that the issues raised by several commenters: shortages of people and equipment, geological challenges, difficulties in getting access to resources, will not restrict supply and contribute to “high” oil prices (high by 1990s standards, anyway) for years to come.
Posted by: Ed Crooks | January 4th, 2008 at 2:18 am | Report this commentBy the way, I would ask you, Steve, how long you are planning to live? The actuaries give me about 50 more years, by which time I trust the peak oil debate will be well and truly settled. Let us hope that by then we will be able to look back on it like the debates over angels on pinheads or the Schleswig-Holstein question.
Well put, Ed Crooks. I suppose I’ve been roped subconsciously into the Saudi-Exxon model of an easy supply ride lasting another five decades or more.
I do think that some analysts frame their conclusions as though political constraints are an unnatural part of supply, and therefore needn’t be included in serious equations. As those who are aware of the history of the last 35 years know, politics are an absolutely integral part of supply. Even when the number of oil rigs and skilled labor meets demand, Russia, Kazakhstan, Venezuela and so forth may still be luke-warm toward sucking a whole lot more out of their fields, it seems to me. Like you, however, I reckon that the world may have worked itself past this knot somehow by then.
Posted by: Steve LeVine | January 4th, 2008 at 5:31 am | Report this commentI wouldn’t subscribe to the rationale behind current rhetoric as there is roughly a 20-25% speculation premiuim built in the current price of crude. Once geopolitical fears are over I expect the prices to fall down to $70s which appearch a very much sustainable range.
Posted by: Tanweer Bukhari | January 7th, 2008 at 11:40 am | Report this comment