BP CEO: Three Oil Myths

Missed this earlier today, but the editorial in today's FT by BP (BP) CEO Tony Hayward is worth reading in its entirety. He beats up on three myths, as he calls them, largely having to do with the role of speculators in the current price run-up; the idea that we are close to running out of hydrocarbons; and that we can switch quickly to a low-carbon economy.

For my money he is less convincing on points two and three, but he makes sense on point one. Resource nationalism is a big issue, as is under-investment -- even if I loathe the line of rhetoric that says our problems are above the ground, not below -- and that needs to change speedily. Trouble is, with countries seeing massive revenue increases from increased price, and thus not needing to invest and produce more, there is little incentive to spend, even at these high price levels. Strangely enough, it means there is little incentive to invest when prices are high, as above, and there is little incentive to invest when prices are low, for obvious reasons. Welcome to the strange and messed-up global oil market.

Here he is on the market's fundamentals:

Yet energy supply has struggled to respond. Production by the Organisation of the Petroleum Exporting Countries fell by 350,000 barrels of oil a day last year. The production situation is even more challenging in the market-oriented nations of the Organisation for Economic Co-operation and Development, where many existing basins are maturing fast. In Britain, for instance, North Sea gas production recorded the world’s lar-gest decline for the second year in a row, falling by 10 per cent in 2007. UK oil output rose very slightly, but this is a one-off, based on a single big new field. Production remains on a downward trend.

The last time oil prices surged to this kind of level, 30 years ago, new production from the North Sea helped bring prices down. This time, new OECD production will have to come from frontier provinces such as the Canadian oil sands, the Arctic and the deep waters of the Gulf of Mexico.

Another big impact on supply is Russia, where production has begun to decline. It is a little-known fact that, until now, the growing demand for oil from China and India in recent years has been met almost barrel for barrel by rising supply from Russia.

As an aside, Hayward says the new BP Statistical Review of World Energy is out, but I only see last year's edition.

Comments

[DONE_SONZ:]

We are in peak oil.Get a clue.

2008 Jun 11 09:55 AM

[.*.:]

It is likely that Supply and Demand will solve the peak oil problem, if it is a problem, just as it has since the dawn of time. Higher prices will drive a thousand subsitutions made by 5 billion people all over the world for the next 500 years. Smaller, cheaper cars and mass transit are two examples. When we experienced "peak whale oil" at the turn of the 19th century, did civilization end? Supply will be spurred by a thousand ways to make money by creating supplies of energy. "Depleted" fields with still half their oil untouched will be reopened. Oil sands and shale EACH containing more hydrocarbons than all the Middle East will be tapped. Sands are already profitable with oil at $80/barrel (which is cheaper on an inflation-adjusted basis than in 1974!). Nuclear, conservation, solar, geo, wind, yes, yes, yes, yes, yes. [Ethanol, only if you are getting money under the table.[

The only thing really that we as a nation have to fear is the United States Congress. Because they have a monopoly on power, Congress has the unique ability to frustrate Energy progress. Congress may well add to the energy crisis they created and engineer a genuine catastrophy. [NOTE: Other catastrophies Congress created include primary education (teachers union protection), public housing ($1T spent to build crime/drug incubators), college tuition inflation (tidal subsidies), health uninsured (tax laws), tort mafia barons (tort law driven), confiscatory taxation (we, you, pay >50% counting all direct and indirect taxes), race relations (quotas), Iraq (maybe), forclosures (Negative interest rates--Humphrey Hawkins driven), Torture Porn/Hollywood (legal "protection"), Border Non-control (accusations of 'racist'), overpaid CEOs (ironically, compensation limit tax laws) and so on. Congress creates most of the biggest problems, headaches, and indignities we face. The ingenuity and common decency of most Americans then helps to address, if not solve, them.

The best we can hope for from Congress, is that they will limit their damage. If they spend less than, say, half a $ trillion on subsidies & pork, and don't frustrate or tax to death the ability and willingness of Engineers, Entrepreneurs, and Investors to create new sources of energy, we will be OK. We can be sure Supply and Demand, and Adam Smith's "invisible hand" will work their magic.

Tax policy matters. Replacing bad taxes with less damaging taxes is a promising idea. Unfortunately, knowning Congress, they will likely pass big new taxes, and keep the former taxes, too. This is what they are trying to do with Cap & Trade, a massive new Tax & Spend regime being debated today.

On the hopeful side, if Congress will only huff and puff, but do no serious regulatory damage, we have a chance. As mentioned, an Entrepreneurial, Pro Growth tax policy would help. The best example would be an energy or carbon tax to replace taxes on growth, employment, and investment--helpful, but not indispensable.

Good Luck!

2008 Jun 11 10:57 AM

[Brahm:]

Paul is either missing or ignoring some important considerations in this discussion on supply and demand, just as Tony Haywarfd is. It is true that hydrocarbon is still adequately available for some time to come from below the ground. However, if you qualify this words oil/gas/hydrocarbon with the words "easily accessible" (accessible here as connotations of depth, below the ground, continenetal shelves, from difficult formations, technological problems or limitations, substantially higher costs/investment levels, etc and etc), then the implications become very clear and unpleasant! Then one begins understanding why OPEC, Russia, and many other nations outside OPEC are reluctant to expand their investment substantially in order to lower the price of petroleum. Or to deplete their cheaply available oil from easy formations to exploit at prices they consider as too low. If their reserves are not too large than their reluctance is all the more understandable, especially if they have nothing more in their economy in addition to energy. The behaviour on these counts is not very different than that of the international oil companies. Remember these oil companies were reluctant to invest in the past when they considered the price of oil/gas as too low, or it was too high according to their estimate to be sustainable (EXXON!). Outside the USA and some of the OECD countries oil/gas resources are often conttrolled strictly by the respective Governments, and this is also a consideration which is limiting for exploitation quite frequently.

Russia is a special case, because Russia is paranoid, based on its history following the Cold War, about getting dismantailed as a nation by hostile forces of the West (Chechnya and Dagestan episodes, etc). So it is using the oil and gas spigot as part of its diplomacy and strtegic approach. And one can't blame for this attitude (George Bush I and II, Clinton and to some extent the European Union) used this to try to change thei Russian geography, and its influence in the former Soviet rerpublics, etc. Reagan, Bush I, Clinton tried to stop pielines from traversing through Russia to starve it of inflluence and revenue, etc, etc. Still so under Bush II, if he were able to manage it, as far as pieline is concerned.

2008 Jun 11 11:30 AM

[RWB:]

Resource nationalism makes good sense if you are lucky enough to live in a country that produces more oil than it consumes--especially a country that doesn't have much else going for it, like Saudi Arabia. Leaving oil in the ground provides income for future generations. The fact that it hurts the world economy right now is, frankly, someone else's problem. The fact that it encourages a modicum of research and investment in alternative energies in consuming nations is not a worry, because no matter what, you know that civilization is going to need oil for decades to come. If I were running Kuwait or Saudi Arabia, I'd slowstep drilling and new production too.

2008 Jun 11 11:33 AM

[Eric Fox:]

"Production by the Organisation of the Petroleum Exporting Countries fell by 350,000 barrels of oil a day last year."

Production fell last year because OPEC is a cartel that fixes production at an artificial level. That's the point.

2008 Jun 11 11:49 AM

[Brian Pursley:]

Oil is infinite: oilismastery.blogspot..../

2008 Jun 11 11:50 AM

[Robert Sczech:]

People who criticize resource nationalism, conveniently ignore the fact that all oil exporting countries are being ripped off. The reason being that the economic value of the oil they deliver is by no means equivalent to the amount of money they receive. In the case of the US, because of the many accumulated trade deficits, the US has not properly paid yet for its past oil imports for a long time. Proper payment means not US treasuries (which are promises of future payments) but real products and goods. The huge oversupply of Dollars in the world (in form of cash and US Treasuries) is mostly due to past oil deliveries to the US which have not been paid yet properly. Doesn't it make sense in a world like this to slow down oil production so some of the oil is going to be preserved for times when real money is going to be paid for oil? The Russians might be paranoid, but they are definitely not stupid.

2008 Jun 11 04:27 PM

[Gandalf:]

When OPEC starts to price oil in EUROs, we will see the real extent of our lack of strategic planning to generate more energy independent of oil and gas.

The alternatives have been mostly ignored by government policy and investment compared with their long-term critical importance.

Not only are we setting ourselves up for energy starvation and bankruptcy, we are ignoring the opportunity to become leaders in the new energy technologies, jobs and profitable investments which the entire world will need in the near future.

We need to transform our economy to generate more GDP$$$
using much less oil/gas. This is an immediate strategy thrust which will require a "Marshall Plan" or a "Moon Shot" level of priority.

Our economic/political system in which entrenched interests seek to forestall their inevitable decline with subsidy treatment has been a major source in our nation's failure to achieve real progress in many areas. In our myopia, we have also failed to notice that other nation's have moved ahead of us in many areas.

We need to think globally and act in our own interests as a nation, rather than to adopt the policies of the entrenched interests who spend so freely in D.C. to maintain their living standards by compromising ours.

2008 Jun 11 05:02 PM

[fxtrader07:]

the beginning of the article sounded great but in essence i have learnt nothing new. seems i will have to go to the FT-ed. thanks to the author for pointing out though.

2008 Jun 12 08:29 AM

[Joules Burn:]

The 2008 BP review is at:
www.bp.com/productland...

As for the Minister of the Church of Supply and Demand, who commented above: keep the faith, baby! When the doubters come a callin', just drag out the old whale oil non-analogy (tho you did forget to mention the stone age not ending for lack of stones) and the vast hydrocarbons just waiting to be dug up and baked out of shale. You also neglected hydrocarbons from Titan and (a true believer's favorite) abiotic oil.

Let us close with prayer:

"Dear Invisible Hand..."

2008 Jun 12 10:11 AM

[User 214584:]

If supply is such a problem, then why is nobody running out and why aren't there long lines at the pumps (like in the 70s when there was a supply problem).

This run-up is simply investors making more money than ever on speculation.

To solve the oil price problem, take oil of the merchantile exchanges and let the market truely set the price--simple as that.

2008 Jun 23 11:57 AM