Saturday, August 11, 2012

Oil Prices 2020: Where To, and Why?

Citi is projecting that (PDF) oil costs will stabilise at $80 to $90 a barrel by the year 2020. And a recent report from Harvard's Belfer Center warns that oil prices may fall precipitously over the next several years, due to a coming global oversupply of oil & gas.

How can these analysts be certain that their predictions will be accurate?

Several factors go into setting the price of oil. Supply and demand are both crucial.

In terms of supply, costs of finding and producing a barrel of oil help determine whether it is worth producing that particular oil reservoir:

Production or lifting costs are the expenses associated with bringing oil and gas from the reservoir to the surface, separating the oil from any associated gas, and treating the produced oil and gas to remove impurities such as water and hydrogen sulfide.Worldwide lifting costs have been increasing since 2001 and U.S. costs have been higher than foreign cost since 2004. In 2007, U.S. production costs were $11.25/barrel of oil equivalent (BOE) and foreign costs averaged $8.88/BOE.  These figures include production taxes of $2.90/BOE in the United States and $2.41/BOE internationally.__Petrostrategies 

Costs for Producing Crude Oil and Natural Gas, 20072009
2009 Dollars per Barrel of Oil Equivalent1
Lifting CostsFinding CostsTotal Upstream Costs
United States  Average$12.18$21.58$33.76
All Other Countries Average$9.95$15.13$25.08
    Middle East$9.89$6.99$16.88
    Central & South America$6.21$20.43$26.64
Oil production costs

Although costs for finding and producing oil increased in the first part of the decade beginning in 2000, such costs decreased in the latter years of that decade:
Finding and lifting costs both declined.

Average worldwide finding costs for the FRS companies decreased to $18.31 per barrel of oil equivalent (boe) of reserves added in the 2007-2009 period compared with the 2006-2008 period, a decline of $5.79 per boe from 2008. Finding costs declined in all FRS regions except the Former Soviet Union, Africa, and the Middle East. The U.S. Offshore, which had the highest finding costs among the FRS regions in 2006-2008, had the largest fall in 2007-2009. Europe's costs also fell substantially in 2007-2009. Europe had the highest finding costs among the foreign regions in 2006-2008. Canada displayed a large decline in part likely because of the inclusion of oil sands in 2009.

Reversing an almost decade-long trend, worldwide total lifting costs for the FRS companies fell $2.66 per boe, to $10.04 per boe, in 2009. Total lifting costs also fell in each of the FRS regions except Canada, where they rose $2.49, probably reflecting the inclusion of oil sands in 2009. _USEIA
The fall in lifting costs in the latter part of the 2000s reflects the drop in cost of oil and subsequent reduction in taxation, which is generally tied to market prices.

Another important factor on the production side, is the "fiscal breakeven price" of oil for national oil companies. Many oil exporting nations depend directly upon revenues from national oil companies to finance government budgets. If oil prices are not high enough to balance the government budget, the government is driven into deficit spending. This might be okay in the short term, but in the long term deficit spending to support routine government expenditures, can be suicidal.

Endowed with about 70% of the world's proven oil reserves and 50% of proven gas reserves, MENA oil-exporters play a critical role in the world energy market. Earnings from oil and gas account for about 70% of total exports, and 75% of budget revenues. The global financial crisis and recession affected mainly the oil exporters (as oil prices peaked and then dropped sharply) and the more globalized jurisdictions such as Dubai where the financial sector and the property market suffered severe setbacks. Massive step-up in government spending along with central bank liquidity support and capital injections into the banking sector helped mitigate the impact of the crisis on economic activity. Many governments in the region remain on a path of strong fiscal expansion, especially in the GCC, where real GDP growth in 2010-11 is projected to average 4.2% annually, still below the annual average growth of 8.0% in 2002-2008. _Source
Russia, Venezuela, and several other oil exporting nations are similarly dependent upon high oil prices in order to meet exceedingly ambitious government expenditures.

WTI prices in the $80 to $90 range and Brent prices in the $90 to $100 range, provide oil producers with profitable returns -- in terms of costs of production -- although governments which depend upon higher oil prices than that to balance their budgets (fiscal breakeven) may be forced to pay a price on global financial markets in order to finance budget deficits.

Political decisions made by oil exporting countries in particular, can affect oil supply. Many oil exporting nations have neglected their oil infrastructure, and allowed their production technology to grow decrepit and obsolete. Mexico and Venezuela are textbook examples of this phenomenon, and Russia is not far behind them. All of these countries have deplorable histories of expropriating oil production assets from private oil companies, which will make it more expensive for them to attract the state of the art outside expertise which they will need to maintain production, to support government budgets. Political decisions to go to war or to threaten war -- such as Iraq's Saddam or the mad mullahs of Iran -- can affect oil supplies. Sabotage of pipelines, guerrilla action in oil producing areas, or theft of oil, can reduce supplies as well.

Weather -- such as Gulf of Mexico hurricanes or North Sea storms -- can also affect oil supplies, temporarily.

In the near future, both discovery of new oil and discovery of new technologies for producing crude oil equivalent and crude oil substitutes from unconventional energy sources -- such as natural gas, coal, biomass, oil shale kerogens, heavy oil bitumens, gas hydrates, etc. -- will also affect overall liquid fuels supplies.

In terms of demand, overall global economic growth, stability, and level of prosperity play a big role. Population growth or contraction will likewise contribute to demand from country to country, along with the dynamics of economies. Consumption subsidies and taxes will likewise influence demand for oil. And if the oil price goes high enough -- as it did in 2008 -- demand destruction can be severe, illustrating the influence of oil prices on demand for oil.

Wars and military actions -- along with other governmental actions -- can also produce spikes in oil demand, which can be reflected on oil markets. China's recent economic stimulus and reserve buildup is one example of this.

On a different level, the United Nations -- via its IPCC -- is seeking to institute international policies which would have the effect of radically suppressing carbon use in more developed countries. Such policies of carbon suppression -- if widely instituted -- might artificially reduce demand for oil in OECD countries.

Robert Rapier looks at global oil demand

Beyond supply and demand, market factors as well as political factors often create temporary swings in oil prices. Highly placed and well-connected oil traders may be able to collude with government officials to take advantage of "tripwire" issues that tend to sway global markets, based on specific fears and rumours. Such actions tend to create temporary disruptions for the sake of quick -- though often sizable -- profits.

The oil price crash / demand destruction of late 2008 - early 2009, combined with a recent improvements in technologies for oil production and discovery, may have given both Citigroup and Harvard's Belfer Center the courage to predict oil prices in the $80 to $90 range by the year 2020.

Such predictions should specify future oil prices in constant dollars, for example "2010 dollars," etc. The value of US dollars has been diluted by insane US government fiscal and monetary policy.

Al Fin energy analysts emphasise that the issue of future energy prices hinges upon political decisions made in the US and Europe. If most of the developed world adopts an energy policy similar to Germany's abominable "Energiewende," or Obama's misguided agenda of "energy starvation," all bets are off, and prices would likely skyrocket.

But if the governments of the developed world experience a sudden energy enlightenment and encourage the rapid development of cleaner, safer, cheaper, more reliable, scalable, and rapidly deployable generations of nuclear power, prices could easily go the other direction, spurred by cheap and abundant electrical power and high quality industrial process heat.

These are essentially political decisions. Voters in OECD countries could play a powerful role in their own energy futures, if they were freed from ideological indoctrination by lefty-Luddite green dieoff.orgiasts in government, the academy, and the media.



Blogger Whirlwind22 said...

Im sure one reason for a price drop will be the global economy tanking again not that it ever recovered. And so the cycle continues.

10:32 AM  

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