$200 Oil Is a Very Real Possibility

A decade or so ago, sustainable energy was thought more in terms of availability relative to the rate of use.

In today’s global economy however, with the constant growing shortage of energy and in light of great demand from the emerging markets, there is clearly growing concern as to how the energy needs are being addressed and what’s being done in prolonging energy sustainability prospects. This includes the overconsumption factor, which consequently elevates the risk of resource depletion.

Currently, the subject of resource sustainability ranks the highest on the world agenda and remains directed at a very critical question. How will the developing countries, including the emerging markets of India and China (which alone constitute 40% of humanity and are fast advancing economically), meet their rapidly intensifying energy needs?

The world presently consumes energy at a steady 15 trillion watts, 86.5% of which comes from burning fossil fuels. By 2050, experts expect demand to increase by another 30 trillion watts. For those aware of the real state of our global energy situation - the next logical question would be : Where is this oil going to come from?!

The sad reality is that despite all the spin and hype about oil, limited supplies of oil simply can not keep up with soaring global demand. During fiscal ‘05, despite the unquestionable fundamentals of the oil market at the time, almost every Wall Street firm projected that oil would cost no more than $25-$45 a barrel in three year’s time.

According to reports, world oil production may have peaked since 2005. If we accept the reality of peak oil production, what are the implications? Unquestionably, price instability. An instability that we continue to experience as of 2008 in both oil and gas markets. (Peak oil does not mean an abrupt end to oil. It does mean that demand of conventional oil will exceed supplies of conventional crude, thus marking the end to cheap crude.)

The idea that oil reserves will be there forever is a non-realistic notion. It is concept that we should disengage rapidly from and instead accept the reality, that world’s wells are at full capacity and at some point will run dry.

A good indication of this theory is that of Saudi engineers injecting close to 7 million barrels of seawater daily into the Gawhar field in Saudi Arabia, which produces over half of Saudi output. This is a fatal sign that the world’s largest oil field is nearing a collapse of output. Keep in mind, Saudi Arabia is responsible for approximately one eighth of the world’s oil. As Saudi Arabia goes, so goes the world.

What’s more, besides the fact that no significant world-scale oil discoveries have been made since the North Sea and Alaska in the 1970s - for the first time ever, Saudi officials admitted to the world’s leading industrial powers - that OPEC will not be able to meet Western oil demand in 10 - 15 years.

Additionally, on average, production in the world’s oil and gas fields is declining between four and six percent and more significantly, almost all the spare capacity has disappeared.

As energy supplies decline the complexity of human enterprise unavoidably will get effected - and whether we like admitting it or not: $200 oil barrel, by the end of this decade - is very much a possibility, if not a certainty.

Comments

[Bylo-:]

Nothing spurs innovation like high prices. This is not to say that new oil wil be "created" but ways will be found to work around the oil shortage with substitutes and new processes to refine existing "un-recoverable" supplies.

The best thing to ever happen to the renewable energy sources, i.e., wind, solar, geothermal, is $100/bbl oil.

2008 Mar 14 08:25 AM

[patrick1951qw:]

your definitly right the world is running out of oil. no future for young people the end to middle class america.

2008 Mar 14 08:43 AM

[User 163728:]

With over 2 trillion bbl of oil remaining there is no shortage of supplies. The terms shortages of crude supplies is used by doomsayers, speculaters and evil OPEC. Nothing would make me happier then continued developing of non-crude oil related energy to transfer the wealth back from the evil players of OPEC, who are salivating over prices now, but will get their due comeuppance over hopefully no longer than the next decade. OPEC=terrorist financing!

2008 Mar 14 08:44 AM

[Option Dragon:]

My article touching the same subject.
seekingalpha.com/artic...

2008 Mar 14 09:27 AM

[Joules Burn:]

Pie in the sky numbers like 2 trillion barrels mean squat. What counts is the rate at which it can be produced, and we are now having to get it from a) smaller and smaller fields or b) deep under the ocean floor or c) by digging it out of the ground and then baking and hydrogenating it to make it it flow (e.g. tar sands). The net result is less net energy available to power your car on, no matter what the price is. And to make matters worse, more and more people want that oil.

2008 Mar 14 09:47 AM

[cjwirth:]

Oil will hit $1000 a barrel a year or two after peak, which should be in a year or two (so in 2 or 4 years). Don't believe it? Try reading this: www.peakoilassociates....

2008 Mar 14 09:58 AM

[burkett43220:]

I say bring on $200/bbl oil. That way human creativity and desperation sets in. Throughout history, we Americans have not rolled over and let destiny take countrol of us. We have always come up with solutions to our biggest problems, however it takes the proper amount of motivation ($200 oil or $7 gasoline should do it). Force us to ween ourselves off of oil and transport and power ourselves by means we have here in our country is the best way for the Middle East to get the US out.

2008 Mar 14 10:33 AM

[thinking ahead:]

There is no substitute for oil. Forget autos. Trucks need oil. Airplanes. Ships. Virtually all transportation. Same with fertilizer. Plastics. Pharmaceuticals. Meanwhile, the NOC's are paying Transocean $600,000 per day to rent ships that can drill 3 miles below the ocean and another 10 miles below the seabed. Every drill ship available and being built is booked for the next five years. Now, tell me this is all the result of speculators running up prices. The NOC's will pay almost anything to secure energy security. Oil is the one absolutely essential commodity for human society, and we destroy 18MM barrels of it every day and growing. I'm making more on oil than on anything else in my career, but I'm afraid for my country at the same time.

2008 Mar 14 12:03 PM

[TruthHurts:]

It needs to be mentioned that none of this is news. I learned about the limits of fossil fuels in high school as part of the regular curriculum. That was almost three decades ago (and it was obviously not in a US school). The experts in the field have reasonable models for oil depletion for half a century.

And it is really up to everyone to inform themselves and act properly. Reality happens to come with instructions and home economics is one of the more valuable lessons to be had. Buying a Prius (or just any other a smaller car) is an absolute no-brainer and currently accounts for an annual return on investment on the order of 5-10% over the average US model, depending on the cost of the car and driving habits. It is almost inevitable that replacing ones car with a newer and smaller model, will pay for itself within five to ten years. Those who want to hang on to their "big iron" will simply have to learn to see driving it as a luxury.

Given that the technological solutions for the next decade of transportation are already out there and that no-cost solutions like ride sharing can be employed by a great many people, I wouldn't be too worried. Will it be painful? Sure! But so is a night of binge drinking. And in the end that is all that's happening here. A nation went on a binge and now it has a headache. Big deal. Not.

2008 Mar 14 04:43 PM

[TA:]

Oil is the new Gold - everyone and his dog is jumping on board - pension funds, you name it buying futures contracts.

Demand actually dropped - technology is not the fix for today's bubble, it's removing the commodity traders ability to leverage - watch it burst then.

2008 Mar 14 06:41 PM

[User 163984:]

So the fact that conventional oil has not increased in over 3 years and is in decline, has nothing to do with the increase in price, it's just a bubble ready to burst... whatever. And no, demand worldwide did not drop, it increased by around 2% last year.
One of the reasons for the oil price increase, besides peaking of oil production, is due to positive feedback loop regarding inflation. High oil prices that began several years ago caused the price of just about everything to go up (inflation). When inflation rises it causes the dollar to drop in value hence causing the price of oil to go up which in turn causes the price of oil to increase, so on and so on.

2008 Mar 14 09:31 PM

[Alan von Al...:]

bylo said: "ways will be found to work around the oil shortage with substitutes and new processes to refine existing "un-recoverable" supplies."

Forget getting the un-recoverable 85% of so-called reserves. When you lose pressure in reservoir, injecting saltwater is a desperate and destructive folly.

2008 Mar 15 04:05 AM

[John Ke:]

Peak Oil has not been reached yet. Speculation, the weak dollar and momentum are driving crude higher in this cycle. This bubble will end with a good pop when the combination of extra production (everybody is pumping at these prices) and a stronger dollar (the fed shall tighten after this credit instability eases) thus triggering a sell off, but not a "bust".
A lot more oil is coming on line from the South Atlantic and Central Asia regions in the next few years. Yes, many current fields are becoming exhausted, but it is the ratio of new production versus declining which is still favorable to the current world situation. When demand reaches 95 to 100 million barrels a day, however; there will occur a period of sudden unsustainability. This will show itself with increasingly persistent shortages not related to distribution problems eg. politics (Ukraine) and infrastructure (Iran/Iraq). Concurrently, the new production versus declining production ratio will become unfavorable and thus there shall be an acceleration of this deleterious effect. A serious issue then will be presented to our world governments which they will have to act on... at a time when a barrel of oil will most certainly cost more than a barrel of milk or one of Coca Cola for that matter.

2008 Mar 15 06:23 AM

[GKM:]

While longer term oil demand is certainly going to be an issue, the short term issue has been the use of oil as a currency hedge. The correlation between the Euro and oil has been extremely high. Euro looks like it is nearing a near term top so oil will likely fall back which will present more buying opportunities. Natural gas when it falls back will be the better buy in my opinion.

2008 Mar 15 02:09 PM

[Fighting Yoda:]

Current oil prices are being driven by the falling dollar and speculation, not supply issues. Dollar will stablize at some point - when Fed stops printing money.
Prices are set at the margin -the oncoming US & Euro recession will further dent deamand then oil prices should stablize likely will fall.

Dollar is the key unfortunately no end in sight.

Tighten your belts and hold onto your jobs.

2008 Mar 16 02:08 AM

[sbenard:]

At first I was a skeptic of the premise of this article. Then I got out my financial calculator. Based upon the rate of energy inflation since Feb 1, oil would hit $150/barrel by May 1, and more than $200/barrel by July 4th. The one thing we have to wonder about, however, is this: Will demand shrink if oil prices keep rising? That's $6-8/gallon of gasoline by mid-summer! I don't know if demand is that inelastic! Still, I hold onto my (gold and) oil ETFs.

2008 Mar 16 04:17 PM

[Jason Rines...:]

At $6-$8 a gallon, you get a depression.

2008 Mar 17 04:27 AM

[onempty:]

The oil shortage that is taking everything down the tube puzzles me, I have never been turned away from a gas station that didnt have gas, the shortage only shows up in our savings, incomes, jobs, and standard of living

2008 Mar 18 12:23 PM

[apinak:]

Don't worry when prices go up enough we will find substitutes, the free-market will find a way.

In a related note, alchemy is making a comeback now that gold is at $1000 an oz.

2008 Mar 18 10:15 PM

[Ames Tiedeman:]

It is not if, but when..

2008 Mar 31 01:58 PM