Are High Oil Prices Here To Stay?

With oil prices rising on a daily basis, Goldman Sachs’ analyst Arjun Murti’s prediction of $200-a-barrel oil seems more and more realistic. Regardless of whether and when that number is reached, there is a growing realization that the days of cheap and plentiful oil are gone forever. While it may be too soon to say that oil production has reached its peak, fears are mounting that energy savings in the developed world will not be enough to offset the rising demand from developing countries.

Today’s New York Times takes a look at Murti’s prediction, which is based in part on the fact that production is declining in non-OPEC countries such as the UK, Norway and Mexico.

The fact that the U.S. gasoline demand can be down and that the U.S. gasoline consumer is no longer driving world oil prices is a monumental event,” Mr. Murti says. He spends most of his time talking to money managers and analysts, many of whom keep asking him if oil prices will stay high if speculators abandon the market, and says he applauds investors for driving up oil prices, since that will spur investment in alternative sources of energy.(Click chart to enlarge.)

Carola Hoyos of the Financial Times’ offers a thorough, and largely discouraging, assessment of the current situation:

A series of recent events certainly appears to lend credence to those who argue that the world’s aging oilfields are being sucked dry amid China’s and India’s determination to lift themselves out of poverty and the west’s reluctance to give up the luxuries of modern oil-dependent life.

The report highlights the belief that Russia’s oil production may have peaked and raises questions about Saudi Arabia’s ability to pump more oil. Matthew Simmons, an energy investment banker took the news that Saudi Arabia was not planning to expand to 15m b/d as further evidence that the kingdom was struggling to ward off a collapse of its oilfields. Simmons notes that the world depends on just a few giant, old, declining oilfields and that almost nothing to match them has been discovered since the 1970s. One in every five barrels of oil consumed each day is pumped from a field that is more than 40 years old.

Not a single field discovered in the past 30 years has ever been able to produce more than 1m b/d and the number and size of fields discovered since then have been shrinking dramatically.

In fact, even if all the policies to increase renewable fuels and to use oil more efficiently were to be enacted immediately, the world would still need Opec’s daily production to increase by 11.5m barrels by 2030, the bulk of which would have to come from Saudi Arabia, the IEA says. That is a tall order, the FT says. It is 50-plus percent more than the amount by which Opec managed to increase output between 1980 and 2006. This time, the oil business is faced with a shortage of skilled labour (the industry’s average age is just shy of 50) and a squeeze in the supply of steel and other critical components.

In a leader in today’s paper, the FT wonders why higher prices have not spurred production:

One answer is that the big producers have all the revenue they can spend, and the higher prices climb, the less oil they are inclined to pump. After all, oil in the ground has so far proved a better investment than most assets a sovereign wealth fund could have bought with extra oil revenue.

The FT does see signs that the high prices are starting to have an impact on the demand side:

Sales of gas-guzzling light trucks in the US have plummeted and drivers seem to be curbing their mileage, too. Consumers are switching to tiny cars, bicycles and even (in Rajasthan, India) to camels. Once-marginal substitutes, such as wind power, start to look like profitable bets.

There is no doubt that the world will adjust to high oil prices. Yet the adjustment would be far easier if oil producers discovered that they could expand their output.

He may still be in the minority in stating that oil production is peaking, but in adding his voice to the “peak oilers,” legendary oil investor T. Boone Pickens is helping tip the scales in that direction. As he told CNBC:

Eighty-five million barrels of oil a day is all the world can produce and the demand is 87 million. It’s just that simple.

Comments

[Eric Fox:]

This article came out yesterday:

Iraq could have largest oil reserves in the world.

"Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world. The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”

2008 May 21 05:19 PM

[sivere:]

We need to develop our domestic sources asap. In addition we need to start developing alternative sources- coal, nuclear, solar, etc.

The $100+ dollar/barrel oil prices are a blessing in disguise, because they make alternatives economically possible. But they will kill us (potentially literally) if there is no organization around developing the alternatives.

This is coupled with a collapse of our financial system. That is the 1, 2 double punch and you are out.

We need, in addition to the above energy scenarios, to TakeBackTheFed.com

If we do not get off our duffs, we will truly be in trouble. NOW IS THE TIME TO ACT.

2008 May 22 03:09 PM

[Urbane Gori...:]

I just filled up today - Regular cost me $4.05 a gallon ... And I noticed that the UK is charging in excess of $10 a gallon ( By the way, I'm guessing that that is an Imperial Gallon, which if I remember correctly is about 8% larger than an American Gallon.... But they could also have adjusted it .. Not sure.. None-the-less..)

I think what we need to do is to start raising taxes on all petroleum products. I'd start with the gas-pumps and begin a federal tax of say 5 cents a gallon, to be raised an equal amount monthly until we are on par with an average European gallon of gas.

Take this tax and begin funding infrastructure and alternative energy sources. This would begin to 'prime the pump' (Sorry ... ) and begin moving us towards energy self-sufficiency.

I'd also suggest dumping the tariff on imported ethanol.. Lets go ahead and partner up with Brazil .. They actually want to do business with us....

Then, I suggest that we tax 'all' oil companies based on their 'lack' of reinvesting in new capacity. While we've been trying to figure out who's to blame, 'large oil' is busy buying back their stock and not reinvesting.. Which makes little sense if oil is soooooo expensive. The beneficiaries will be the companies that are helping dig us out of this mess.

Oh yeah... I'd also suggest that blowing holes in foreign countries is just plain wasteful.

Thx jegan

2008 May 22 09:28 PM