Maxwell's Oil Analysis

Charlie Maxwell, the energy analysts who’s been calling out values in oil and gas companies for decades, recently issued his long range oil price and supply/demand forecast.   It calls for a range-bound oil price of $75 - $115 for a couple of years or so followed by new high prices in 2011 - 2012, $200 oil in 2013 and $300 in 2015.  His fundamental model is very close the the analysis of megaprojects that I recently posted.  He sees tightness creeping into the supply/demand dynamics in 2010 and increasing particularly in 2013 and beyond, just as I wrote last week. 

On the other hand, Maxwell draws price implications that are more benign than my own.   Where he sees oil at $200 in 2013, I’d be surprised to see it under $300.   And where he sees oil at $300 in 2015, I imagine it will be closer to $500.

There is a tendency to look at the recent oil price spike to $147 and relate it to the weakening U.S. and global economies, drawing a conclusion that the economy is super-sensitive to oil much higher than $100.  That thinking tends to suggest lower limits to the oil price on the basis that a higher price would destroy the economy and therefore reduce oil demand and be self-correcting. 

While high oil prices certainly are a depressant on the U.S. economy, to the extent that the money gets recycled by the oil exporting countries it is more or less neutral for the global economy.  More to the point, the current economic weakness we are seeing has everything to do with falling real estate prices and crazy mortgage and related credit risks that were created long before oil passed $100 a barrel.  In short, our current economic woes, in my view, have very little to do with oil as compared with other factors. 

So I think the wrong lesson is being learned about how high oil prices can go.   On the other hand, Charlie Maxwell is a good deal wiser and more experienced than I am, so if he proves more right than I as to the out-years’ oil prices, it would not be a surprise.  What is gratifying to me is that his view of the timing of oil supply and demand changes and the relative ability of the oil supply to satisfy demand going forward to 2015 is very similar to that which emerged from my analysis of megaprojects data.

Comments

[Barry Robbins:]

I think many oil analysts are underestimating the panic that will result when the general public realizes that we face ever-declining supplies of oil. Few people realize the scope of the problem. Hopefully by 2013 we will have made much more progress with wind, solar, natural gas, and plug-in hybrids.

2008 Sep 10 10:34 AM

[mrshihtzu:]

One thing that so many fail to consider when mentioning plug-in hybrids is how do we generate the additional electricity required to run such vehicles. The US likely faces an electricity shortage in the next 10 years or so.

2008 Sep 10 10:53 AM

[Jim Kingsdale:]

Some analysts think the existing grid can supply up to 80% of U.S. car with electricity because they will be recharged at night when there is plenty of spare capacity. I don't know what the right number is but I do think there is a lot of off peak spare capacity.
The problem will be producing enough plug in hybrid to satisfy demand and make a difference. Another problem is getting a cost effective efficient battery - not totally here yet.
So bottom line is that plug in hybrids won't solve the oil price crisis we will face around 2013.

2008 Sep 10 11:16 AM

[kebu77:]

Barry and Jim: Will panic set in too late to make the radical changes needed to smooth the energy transition? Electric cars will come too late and cost too much. On the other hand, a rapid expansion of railroads and rail electrification would introduce the massive efficiencies needed to save liquid fuels "in a hurry" (the IEA's term).

Electrified rail moves freight about 20X more efficiently than trucks. Pickens' plan to burn CNG in trucks and cars means burning more coal and spending money we don't have on increased road maintenance (as the depleting highway trust fund collides with tax resistance).

Alan Drake recently made such a proposal, in detail, on The Energy Drum - - www.theoildrum.com/nod...
Electrified Railroads

Excerpt: "Electrifying our freight rail system will provide a Non-Oil Transportation alternative in an oil emergency, whether acute or chronic. Regardless of oil prices or availability, there would be a backbone of essential long distance transportation that requires no oil. And the USA, with Peak Oil arriving, appears to be moving rapidly towards a chronic oil price and affordability emergency."

2008 Sep 10 11:39 AM

[ROC:]

Why is it that the US public only responds to an emergency, and is indifferent to developing crises? Maybe education in investment terms would change attitudes toward long-term consequences.

2008 Sep 10 01:09 PM

[User 259332:]

$300+ on "world demand increase" is ridiculous. Do you have any idea how many people in the world live on less than $2 a day? Are these your future customers?

Face it, we've been taken to the cleaners by hedge funds and institutional traders. Oil will only stay high until the next big thing comes along.

2008 Sep 10 01:48 PM

[Sober Realist:]

"rapid expansion of railroads and rail electrification would introduce the massive efficiencies" - Yes, this is our only hope. Europe has the extensive Eurorail system and we have nothing like it. Amtrak is very bare bones:
images.scripting.com/a...

compared to Eurorail:
rufus.hackish.org/albu...

Unfortunately, how will we fund such an extensive project in time? It won't happen because the public thinks we can drill our way out of this problem. The Collapse is underway right now.

2008 Sep 10 05:52 PM

[G. L. Turner:]

Yes, Oil will return to some new levels in years 3 - 5 out before the megaprojects and conservation and alternatives begin to kick in. But, your price speculation reasoning of $200 to $300, is most probably high as it is assuming that the $147 price that was reached briefly was a highwater mark based on some initial validity as to price fundamentals...It wasn't. The s/d fundas would have keep the pricing in the high $80's max even with the Iran/Putin stir up and China's 2004 demand spike. Nope, it was way high due to Goldman Sachs need to have their P L Investors make profits and keep investing - it was a runaway train...so, yes we'll see high prices, but not as high as the starting point will be based on reality, especially if the Commodity Spec Act is passed!

2008 Sep 10 10:28 PM

[DrT:]

Using electricity "off-peak" saves on capital cost of infrastructure but if the electricity is produced by NG, coal, etc. there is still a significant cost per kw. True savings comes from keeping the rise in price/kw from rising too fast (flat prices are too much to hope for).

2008 Sep 11 12:46 AM

[mangolfer:]

No!! If oil at $147 started to stop the world economy, I can only imagine $200+. Another thing missing here is new technologies for getting the oil. Like everything, the price of these technologies will come down as they are used to get the oil out and refine it. The market will fix it self like it is doing now. Also, inflation is kicking in big time right now to catch up with oil. (Products I sell are having multiple price increases at the wholesale level to cover shipping and raw material increases. Next wave of price increases will be to cover wage increases to keep up with inflation).

2008 Sep 11 08:14 AM

[NOWHEREMAN:]

Years? Try months instead. Look at oil as if were a stock rather than a commodity. It based for decades before finally breaking out, backtracked to it breakout area and the momentum players finally took it to new highs. It is now approaching the previous high where new participants will realized how absurdly underpriced the stock is and get back in dragging the momentum players back in as well.

At a $100, oil is again below what Inflation Adjusted prices suggest it should be. It should have a brief move below just to get rid of the "Weak Hands".

You Either have the conviction to stand behind the Peak Oil theory or you don't.

Nothing can be done to stop this Juggernaut other than a long worldwide recession. No elected Government can hope to stay in power if they allow this to happen.

Other Governments will cut taxes both Corporate and Business to stimulate their economies, we will reap the benefit of across the board tax increases under BO.

2008 Sep 11 09:35 AM

[Jim Kingsdale:]

Paul, having conviction about Peak Oil is not the same as thinking that oil is truly scarce right now. Timing may not be everything - unless you measure your profits each day, week, month or quarter. In which case the real likelihood of a near term over-supply in oil is something to consider before buying oil on the basis that you will be proven right in 3 - 5 years.

2008 Sep 11 10:44 AM

[Steven Ward:]

One problem with peak oil is political in the sense of increased nationalization through taxes from the English speaking countries of the world, the US, the UK, Canada and Australia.
As oil goes higher politicians seem to deal with voter anger not by expansion programs for drilling but punitive measures against those who still have reserves in the ground thus compounding the problem Peak Oil will have an artificial " Price Peak" to it based on the political policies.

Already, pressure mounts on PM Brown to tax the oils again. Australia is removing subsidies, a much milder form and one that has merit based on today's pricing, but how much longer can the Aussies wait when billions of barrels of LNG equivalent start running off their shores to an energy starved Asia at the highest gas prices in the world.
They won't wait long for an extra tax bite.
Nor will Canada and the US. Canadian Provinces of B.C. and Saskatchewan will develop oil and gas at their current tax rates then move in when development is near a certain level. The US will grab more in royalties no matter who is President. The trend is clear, Peak Oil also has a Political Price Peak, as well adding additional burden.

2008 Sep 11 11:42 AM

[Sober Realist:]

Did anybody read this:
The real reason commodities are tumbling
9-10-2008
"I happen to fully believe that our markets are being largely
influenced by official acts, both overt and covert. My logic is
simple; where motive and opportunity co-exist, the burden of proof
shifts to the accused.
The Central Banks and the Treasury had a powerful set of motives to
shift money away from commodity hedge funds and into the stricken
banking system. Their opportunity is both well characterized and self-
evident, so I won't go into that here..."
www.chrismartenson.com...

To hear Donald Coxe tell it, the commodity selloff ripping through
Canada's stock market is no accident. It is the result of a
deliberate, brilliantly executed plan hatched at the highest levels of
the U.S. Federal Reserve and Treasury.

Mr. Coxe is no paranoid conspiracy theorist. As the chairman and chief
strategist of Harris Investment Management in Chicago, he is one of
the most respected investment authorities in North America. He also
happens to have lost about 10 per cent of his personal wealth in the
commodity rout, which came at the worst possible time for his Coxe
Commodity Strategy Fund that started trading in June.


“This has done more damage to my personal wealth than anything in the
last 20 years,” he said in an interview yesterday. But he has too much
respect for how the U.S. authorities engineered the collapse in
commodities – a move he said was necessary to shore up the global
financial system – to be bitter.

“My attitude is, goddamn it, they're good … it was brilliant.” ...
www.reportonbusiness.c...

2008 Sep 11 01:56 PM

[OilDaddy:]

As an oil field production engineer, oil banker, investment banker, venture capitalist and petroleum engineering consultant to major and independent oil and gas companies, insurance companies, banks and private investors over the past fifty years who left the oil fields in 1962 because of poor economics and a questionable future and as one who in 1969 accurately predicted the 1973 world oil supply shortages and in 1999 accurately predicted the 2003 world oil supply shortages with their accompanying two and three fold oil and natural gas price increases, I find it hilarious reading predictions by today's so-called energy experts calling for ridiculous future oil prices based upon a dying oil era.

These are the same "experts" who failed to see the forest for the trees when low, i.e., fifteen years' of $3/B average U.S. oil prices between 1958 and 1973 orchestrated by Congress using steadily rising imports (1.0 to 6.0MMBPD) of cheap foreign oil to stimulate U.S. and Japanese and SE Asia economic growth discouraged development of new U.S. oil supplies, destroyed the U.S. oil industry's oilfield infrastructure and froze OPEC oil supplies causing world oil demand and supply to come to balance, and failed again in 2001 to see that $15/B average oil prices between 1986-2001 orchestrated by the Group of Seven Industrial Nations using strategic oil reserves and false oil reserve and supply estimates by their public mouthpiece, the International Energy Agency, to spur industrialization of China and India so as to ease inflationary pressures in the industrial nations was utterly destroying the U.S. oil producing industry and decimating the International oil producing industry's infrastructures causing world oil supply and demand to come to balance setting off two and three fold price increases. So why anyone takes whatever they say seriously is a puzzle to me.

The world is suffering fifty years of blatantly illogical, academia generated, economic policies relying upon dirt-cheap energy with no allowance for the steadily rising inflationary costs of ensuring continued development of the cheap energy supplies. One such academia based economic genius defended destroying the U.S. oil industry to me with the statement that "Japan built its economy without having an oil industry, so the U.S. doesn't need one and, in addition, there's enough oil in the Middle East and the Caspian Sea Regions to supply the U.S. needs for the foreseeable future"! An excellent depiction of this type of reasoning that I have had for years is a cartoon panel starting with a very healthy cow with four utters and four milkers in panel one, a much less healthy cow with eight utters and eight milkers in panel two, an obviously emaciated cow with twelve utters and twelve milkers in panel three and a dead cow with the twelve milkers standing around scratching their heads and muttering to each other, "do you think we should have fed her?"

Now that the Russian, Chinese and Indian middle class societies are discovering the advantages of a petroleum driven economy, it won't be too much longer before they will produce the technicians needed to restore the once vibrant international oil industry's infrastructure back to health.

As for the U.S. oil industry's infrastructure, there exist many sizeable oil producing development opportunities available, as for example, the 30 billion barrels of oil in the ground in the Permian Basin of West Texas and the 20 billion barrels in the Los Angeles Basin of California that operators abandoned back in the mid-to late 1960's due to poor economics and the onslaught of environmental regulations, that could serve to help reconstruct a healthy oilfield infrastructure. However, the U.S. Congress is going to have to, first, get rid of their brain dead, college based, energy policy advisors, secondly, restore the economic incentives Congresses in the 1930's enacted to encourage private investments in energy and hard rock mineral development and thirdly, recognize that the oil and mineral industries are very capital intensive, long term committments requiring price stability. If the Congressional morons can guarantee major oil companies against losses to encourage the majors to enter and develop Russian oil fields, they ought to be able to do the same for the U.S.

2008 Sep 11 01:57 PM

[NOWHEREMAN:]

oildaddy, thank you.

Timing/shiming, 2 years of great yields followed by conversion into corporations with great earnings. I can/am going to live with that.

Meanwhile, other Trusts are offering comparable yields not tied to oil production. I suggest diversification.

2008 Sep 11 03:08 PM