Oil Price Decline Bad News for Future Supplies

As consumers rejoice over sub-$2-a gallon gasoline, Capgemini points out that the decline in oil prices is very bad news for future oil supplies. In its annual European Energy Markets Observatory, Capgemini ticks of a litany of worrying developments:

• Long term investments in exploration projects require stability in oil prices. Price volatility increases investment risks.
• A big drop in oil price will render expensive projects no longer financially viable. $90 per barrel is about the threshold below which production from the extra heavy oil sand in Canada would not give a satisfactory Return on Investment. At the same time, this heavy oil is needed for the future, and investment needs to start now.
• Even if economies of Western countries slow down or even go into recession, pushing down their oil consumption, it will not be enough to offset the steady consumption growth in the developing world.
• Technical difficulties to replace current oil production with new discoveries will remain.
• Unfortunately, there is little hope that geopolitical tensions between some oil and gas producing countries, notably Russia and Iran, and the western import countries, will ease soon.

In order to comply with the forecasted energy demand growth and replace aging infrastructure, huge investments are needed Capgemini notes:

At 2% global economic growth rate, the world would need about $22 trillion cumulative investments in energy (oil, gas and electricity) infrastructure between 2006 and 20304, half of them in developing countries.

“In the previous EEMO editions, we estimated that €1 trillion investment is needed in electricity and gas infrastructures in Europe. Our report cautioned that without a vigorous construction program, security of energy supply would be threatened. Since then, raw material cost growth and difficulties in finding qualified human resources have pushed investment amounts up and delayed commissioning dates of some much needed plants, electrical grids and pipelines.”

Comments

[Prudent Man...:]

Need and Editor!

2008 Nov 25 03:41 PM

[jepittman:]

Sheeeesh! More worthless gibberish.

2008 Nov 25 05:34 PM

[mangolfer:]

Another guy that bought into oil at the high point.... Same ol, same ol

2008 Nov 26 06:04 AM

[Ferdinand E...:]

Makes all the sense in the world to me, with the exception of the $90/b estimate and the talk about 2030. I thought that only the IEA knew exactly what was going to happen in 2030, which is a good reason for stopping your conjecture about 15 years earlier.

2008 Nov 26 08:37 AM

[je:]

This guy is pretty much on the right track. This not only applies to oil production being suppressed by the low price but this also applies to precious metals miners as well.

2008 Nov 26 09:47 AM

[scfranklin94:]

Gee, I guess people are starting to figure out that we're dealing with a semi-inelastic commodity; so we'll have higher highs and lower lows in the future, what a revelation.

2008 Nov 26 10:53 AM

[Lesismore46:]

With the stimulus packages, the interest rate cuts, the bailout of financial institutions, and extension of tax cuts, I estimate that the recession will be short lived and not as deep as expected. However I agree that as energy companies postponed expensive projects, shut down production, and lay-off the experienced human capital, the country will be in for a new oil shock in the near future. Like a diet, conservation does help in the short term, but eventually consumers appetite return to previous levels. With renewable energy sources virtually abandoned, we will not see $40 oil, but $100 is possible in 2009.

2008 Nov 26 12:01 PM