Tuesday, December 23, 2008

THE MISLEADING FEEL OF LOW OIL PRICES

Tony Allison, Financial Sense - Aside from a few Paul Revere's such as Matt Simmons, there is precious little media alarm or urgency over an issue that is historic in nature and monumental in scope. The stark International Energy Agency report released this fall was mostly ignored in the media, other than to highlight that 2009 will feature "demand destruction." Other headlines touted "Goodbye to the oil supercycle." The message sent to the public; lower oil prices ahead, problem solved. Unfortunately, the critical message of 9.1% global oil depletion was ignored.

The first line of the IEA report set the tone. "The world's energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable- environmentally, economically, socially." The last line of the report set the agenda. "Time is running out and the time to act is now.". . .

Oil prices may not rise significantly in 2009, as economies deflate and weaken around the globe. However, temporary demand destruction does not hold even a small candle to permanent supply destruction. To add to the problem, exploration and production around the world is downsizing, as the dramatically lower oil prices make projects uneconomical. Looking at the current 9.1% estimate of global depletion, combined with shrinking levels of drilling and exploration, the medium term outlook is daunting. According to the IEA report, "There remains a real risk that underinvestment will cause an oil supply crunch. The gap now evident between what is being built and what is needed to keep pace with demand is set to widen sharply after 2010.". . .

Looking out longer term, to 2030, the math gets ugly. Current global oil production is 72 million barrels per day. According to Simmons, if the world spends a fortune (many trillions) trying to mitigate the depletion rate, it is estimated global production will fall to 25 million barrels per day by 2030. Without the mitigation, world production will plunge to 9 million barrels per day. If those numbers are not a wake-up call to the world, the coming shortages will certainly provide it.

Simmons has stated that we need to find "four new Saudi Arabia's" just to keep global production flat in the coming decades. The best geologists in the world with the latest high-tech exploration equipment haven't been able to find one Saudi Arabia. The chances of them finding multiple super-giant oil fields, and soon, are not overly promising. . .

According to Matt Simmons, by the end of 2009, Mexico will no longer be an oil exporter. If Simmons is correct, it will be very difficult to replace the oil revenue that has supported 40% of the Mexican budget. The Mexican government has recently taken the unprecedented step of voting to allow foreign oil companies to explore for oil in Mexico. In a country that celebrates the 1938 nationalization of its oil industry as a federal holiday, it was clearly an act of desperation. Promising offshore discoveries in Mexico will likely take decades to bring to production, according to Simmons, due to the extreme depths and massive technical challenges. . .