Sunday, June 17, 2012

The Lesson of $147 a Barrel Oil

Peak oil doom theories are falling out of favour among the smarter set of investment bankers and energy analysts. While doomers took the lesson of $147 a barrel oil to mean that peak oil doom and civilisational collapse were right around the corner, smarter people decided to sit back to watch and see what would happen on a longer time scale than the doomers' typical 30 seconds of attention span.

Lo and behold, $147 oil brought a lot of ideas and technologies out of the woodwork.
That is the lesson of $147 oil. It propelled shale oil technology and drilling more rapidly than anyone expected. And if you top off shale oil technology with the arrival of more fuel-efficient car technology, ditto on the possibility that oil prices will moderate over time. Experienced futures brokers like Andrew Lebow of Jeffries Bach agree: Shale is already taking the wind out of the sails of long-term oil futures prices. _NYT
As in past decades, technology is increasingly upending fears of impending oil scarcity, causing the costs of unconventional oil and gas development to fall dramatically. Indeed, the technology costs of converting one form of hydrocarbon to another and the costs of providing alternative automotive engine technologies are also likely to fall. So I feel at peace with my original contention that, in the long run, oil prices are cyclical, and that high prices invite the creation of new technologies, ensuring that the upswing of the cycle is eventually followed by the downward slope.

...With the shale oil boom promising over one million barrels a day of new oil production within a year in the United States, analysts are coming out of the woodwork to embrace falling oil prices. The new word on the street when it comes to oil is “sell.” Already, the long oil price, that is, futures prices going out past a year, has fallen to $85 a barrel, down from over $100 a barrel earlier this year.

Citigroup Global Markets took the lead last week with predictions of a cyclical shift that could cause prices to slide in the long term to as low as $50 a barrel. In their latest publication, “Zeroing In On the Long-Term Oil Prices,” Citi analysts state: “Signs are abounding that the escalation in upstream capital spending is bearing fruit, with a surge in discoveries and reserve bookings that is already being converted into new production, particularly in North America.

“There are no reasons to believe the supply boom in Canada and the United States is about to end,” they write. “To the contrary, it appears likely to start spreading across the world.” _NYT

It is best not to assume that shale oil & gas will be the most revolutionary energy technology of this decade. There are likely to be other surprises in store which will overshadow tight oil & gas technologies, in terms of expanding available energy supplies. It is only a question of when.

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