Bill Totten's Weblog

Sunday, January 13, 2008

High oil prices?

You ain't seen nothing yet

by Rose Ragsdale

Petroleum News (January 12 2008)

"If we don't change our course, we'll end up where we're headed". -- Chinese proverb

"Down one road lies disaster, down the other utter catastrophe. Let us hope we have the wisdom to choose wisely." -- Woody Allen

If you think $100 per barrel oil is costly, consider $180 per barrel oil.

The former is here, while the latter may be in our not-too-distant future, according to two well-known oil industry analysts.

While energy prices retreated during the second week of January amid continued signs of a slowing economy and forecasts for mild weather in the Northeast, crude oil prices are still hovering about seventy percent higher than year-ago levels.

The litany of reasons for this rapid run-up in prices has been well publicized, but the key question is where oil prices will go from here.

Oil industry guru Matthew R Simmons says he has no clue and little concern about what will happen to oil prices in the short term.

"At some point, high prices will make an impact. But oil prices have risen ten-fold in the last nine years, and it hasn't hurt the economy. I don't know where oil is going in the short term. It's a very volatile market. A year ago, oil prices broke $50 a barrel", Simmons told Petroleum News in a January 8 interview.

In the long term, Simmons expects oil prices to continue to rise.

"Prices going up another $20 to $30 are no big deal. But all the so-called experts are insisting that prices will go down", he said. "We should be extremely cautious about what to expect. What surprises me is how cheap oil prices are".

$100 per barrel oil is cheap

At $100 per barrel, oil costs about fifteen cents a cup, says Simmons. A cup of oil converted to transportation fuel such as gasoline will carry a vehicle loaded with six people about 1.5 miles.

That's a real bargain when you consider that after an hour of haggling, you might be able to get the driver of a rickshaw or horse and buggy to carry you that distance for $5 or $6, he said.

"$100 (a barrel) oil won't kill any significant economy", he said. "As energy prices rise, which they will, if the phenomenal wellhead revenues generated are reinvested into rebuilding a very rusty global energy infrastructure, they will create the world's largest construction project and create a global shortage of blue-collar jobs and a boom for engineers and many sectors of the manufacturing industry".

Recession could depress oil prices

Oil industry analyst and congressional lobbyist Roger Herrera told Petroleum News that people should hope Simmons is correct in his expectation that $100 per barrel oil won't hurt the economy.

"One-hundred-dollar oil is, by far, the lesser of the two evils", he said. "But for a degree of greed and silliness in the subprime housing market, we would probably be looking at oil some way above $100 and not minding it one bit", he said.

Herrera said the perennial question is whether high oil prices will send the US economy spiraling into recession.

"If it does, there is little doubt that our oil usage will be significantly reduced perhaps by more than a million barrels a day. No doubt the Chinese and Indian economies can easily absorb an extra million barrels each day. In fact, they might relish such a windfall. If their economies continue to grow at the rates of the recent past, then there is little obvious reason for the price of oil to be reduced", Herrera said.

"On the other hand, a recession in the States will sooner or later have a slowing effect on China's economy. If that happens, there will be a slight lessening of world demand that could quickly translate into a price reduction of perhaps $20 or more", Herrera said

"A delay of a year or two in world growth only pushes us closer and closer to the peaking of world oil output (assuming we haven't already reached it), so a recession with a possible reduction in oil price will have no good attributes", he said. "We would be better off facing up to the inevitability of more expensive oil and doing something about it".

$180-a-barrel oil would hurt

Simmons has calculated that oil will have to climb above $180 per barrel before price pressures force voluntary conservation.

Evidence from Britain tends to prove Simmons right.

"A US gallon of diesel costs $7 in the United Kingdom (most of it due to taxes)", Herrera said. "That is equivalent to about $180 per barrel for oil. There is clear evidence that UK truckers are beginning to revolt at these costs by blocking refineries and other protests. So, Simmons is absolutely right when he says that $100 oil is cheap."

A bigger worry for us than oil prices should be oil supply, according to Simmons.

"Sadly, the United States of America, the world's most advanced economy, has no fuel gauge of any sort to indicate when our useable spare supply of crude oil and (refined) products is nearing empty. And the stock data of the USA is the best published oil data of any country", Simmons said.

"None of this would be alarming if 'peak oil' was decades away. But, this is a fool's dream."

Simmons and Herrera agree that mounting evidence points to "peak oil" having occurred more than two years ago when the Energy Information Administration reported record global crude output of 74.3 million barrels per day in May 2005.

Peak oil refers to the notion that at some point the world will reach a peak in the rate at which it can pump oil out of the ground.

Current world crude output averages less than 72.5 million bpd, down about two million bpd from 27 months ago, while world oil demand, about 88 million bpd, continues to grow unchecked.

With global demand projected to grow to 115 million bpd by 2020, Simmons said numerous dangers would accompany a significant depletion of world oil supplies, including social chaos brought on by widespread hoarding as well as geopolitical conflicts that could lead to war.

"Oil shortages worry me", he said. "China is extremely conscious of how flimsy oil supply is and is doing everything they can to lock up supply".

Bill Totten


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