Saturday, May 24, 2008

The Oil Controversy

Tom Bower pooh-poohs "Peak Oil" claims in the Daily Mail, saying there's several times more to come out of the ground than has ever yet been extracted. His book on the subject is due out soon.

I should like to see what energy commentators like Nick Drew wish to say to this. From what I've read, remaining oil stocks are likely to be of lesser quality and will cost far more to extract than God's gift to the Saudis (which, I understand, is already being exploited at a rate that is damaging the field).

Granted, oil is massively over-taxed. Americans would head for their gun rooms if they had to pay £5 a gallon.

Meanwhile, the FTSE continues to float cheerily above 6,000 and the Dow above 12,000 - for how much longer?


Nick Drew said...

Sackers - discounting for the polemical tone of Bower's piece (he's promoting a book to Mail readers !), I broadly agree with him.

Here are some one-liners that IMHO delineate the space:

- speculators have only a modest part in this (unlike, say, gold)

- there will be no physical peak reached in our lifetimes

- average production-cost in 2008 is still much less than $40/bbl

- ACCESS is key: increasingly the reserves are in the hands of those who are not commercially driven (this might have several scary consequences ...)

- when supply and demand are very tightly-balanced (i.e. right now, even though more supply could / should be forthcoming, see above), prices spike far more dramatically than people imagine they should: they cry 'market failure' when it is no such thing

- when demand drops off a bit (see your own blog passim for reasons why this might happen !!) the correction will be equally dramatic (and equally 'unexpected' in many quarters)

Personally I am not ready to short this one quite yet. But I do reckon it (the oil price, not production !) will peak in 2008 - see our predictions for this year

hatfield girl said...

Not being ND I hope it's alright to suggest that low interest rates yield high commodity prices, it isn't a physical oil shortage. We've lots of oil for lots of time.

Ryan said...

I met an oil exploration export in a bar in Germany once, and for what its worth he told me that there was actually plenty of oil underground but it would be more difficult to extract putting prices up by double current prices.

He pointed out that in Saudi Arabia the oil almost pumps itself to the surface and requires minimum effort to extract, and that makes it cheap. This means it isn't really worth trying to get oil from elsewhere, because you can't compete with Saudi production. As Saudi production becomes more expensive it becomes more viable to really start to extract oil from other places.

Oil companies are reasonably happy to go along with the "peak oil" concept because they like high prices and don't want to invest in new fields that are unprofitable compared to Saudi. Also, they see no benefit from investing in new refineries to process all this extra oil, since they make more money from the by-products than they do from vehicle fuels. If they make more vehicle fuel then they would have a surplus of the profitable by-products. (A litre of gloss paint costs a lot more than a litre of petrol, so I can see his point!)

He also pointed out that there was a vast belt of oil reserves stretching across Africa, but since the Africans had realised this they were fighting like hell to be top dogs to be the ones taking the profits from the oil. Due to all these civil wars, further exploration and extraction in Africa becomes impossible. Expect the US army to be making its presence felt in Africa in the next few years....


Thanks to all of the above, this is most interesting. Perhaps the UK government is quite happy to go along with the scare stories in order to benefit from the extra tax revenue. I read recently that Harold Macmillan (as PM) sat on evidence of the damage that smoking does, for the same reason.