insideoil

Ethanol Has OPEC Publicly Concerned

Todd, maybe, just maybe, with present high costs of construction and the shortage of qualified people to do the work, the IOC's and NOC's are biding their time to see if prices will remain this high ( fear of recession dropping demand , or competition from substitution by ethanol). What incentive is there to invest in projects that have tripled in capital cost in the last three years - without certainty on return for the lifetime of the project (20 years).

Also what incentive to invest at all if you know you will remain mega profitable if the current growth continues. No one can ramp up faster or cheaper supposedly to meet this growth than OPEC, and many that claim they have added reserves either do not have it or will have to pay substantially in ultra high capex costs to get the product available. What incentive can there possibly be to challenge the status quo.

The fear of facing a drop in demand from recession - is no real challenge - as it will under such circumstances be possible to build new capacity for a more reasonable capital price. The NOC's are effectively neutral to the cost/benefit of making investments under growth or recession circumstances.To invest however when costs are high and the potential exists for prices to fall sharply once you have spent the capital makes little sense strategically as it high risk, with no added benefit.

OPEC is no charity - they will do what makes sound investment sense for them. I doubt they have any major concern over a growth slowdown. Fact is they know the customers are short, but they are still willing and able to pay the price. So until the USA really does something significant like decrease fuel consumption per mile, I very much doubt OPEC is going to be overly concerned. If the USA cannot even get a few refineries built - then I guess there is not much for oil providers to worry about nuclear or coal exploitation - which anyway will take 6-8 years to bring on-line. Plenty of warning time for OPEC to crank up output - if they can that is !!

Short term output increase is a dream - there is nothing in it for any of the players - so the price will crank up until the consumer pops. Be they American, Chinese, Japanese, Indian or whatever. The only fear America should have is that the Russians are also making a ton of money, and are rebuilding their country to be a formidable future competitor on a global basis.