When the market cuts the price of oil in half within three months it is sending a clear signal to producers that there is sufficient capacity to meet global demand for at least the next decade. Well, maybe not. The International Energy Agency (IEA) seems to think that recent price feedback information is exactly the opposite of what is needed to ensure energy needs are met. What does this mean for all of us energy consumers and our portfolios?
Most of the world's oil comes from a few major fields, all of which are old and experiencing declines in output. The days of easy oil may very well be coming to an end, despite the collapse of crude prices this fall. In Twilight in the Desert, Matthew Simmons laboriously analyzes and casts doubt on the Saudi government for obscuring oil reserve data. He postulates that the world's largest fields, particularly those of The Kingdom, will not be able to produce enough supply to match growing future demand.
The IEA recently calculated that established field production is declining at an annual 6.7 per cent rate, which is scheduled to accelerate in the near future. On top of this, the IEA predicts demand to grow to 106 million barrels per day (b/d) by 2030, from 85 million b/d last year. To meet demand growth, an estimated 45 million b/d additional capacity needs to be found and brought to market.
With oil-related capital investments on the decline it is not likely that the world will be able to meet future demand. Consider this:
1. Minimum required investment schedules needed to increase capacity are not being met: The IEA estimates that in 2007, alone, the world needed to invest $450bn to develop capacity, whereas only $390bn was allocated. Now that prices have collapsed you can bet this investment figure will drop. 2. The oil business is becoming increasingly socialized, with many international governments taking over their industries. This makes production far less efficient. Take Venezuela's production declines as an example. 3. Increasing political risks are decreasing investment decisions domestically and abroad-think "wind-fall profits" tax.
Oil prices currently reflect a dire economic outlook. Markets are discounting the commodity betting that future demand will temper with cooling growth rates. This is certainly true in the near term, but a decade from now we will wake to realize that supply is desperately imbalanced with demand. Oil is a precious resource upon which our civilization is dependent-prices have nowhere to go but up. In the near term oil can be used as a hedge on inflation. it is denominated in US dollars in global markets, and so when the USD decreases (due to inflation) oil prices will increase. Considering that the US money supply has gone up 111% in the last three months this is a reasonable bet! - 15224
Most of the world's oil comes from a few major fields, all of which are old and experiencing declines in output. The days of easy oil may very well be coming to an end, despite the collapse of crude prices this fall. In Twilight in the Desert, Matthew Simmons laboriously analyzes and casts doubt on the Saudi government for obscuring oil reserve data. He postulates that the world's largest fields, particularly those of The Kingdom, will not be able to produce enough supply to match growing future demand.
The IEA recently calculated that established field production is declining at an annual 6.7 per cent rate, which is scheduled to accelerate in the near future. On top of this, the IEA predicts demand to grow to 106 million barrels per day (b/d) by 2030, from 85 million b/d last year. To meet demand growth, an estimated 45 million b/d additional capacity needs to be found and brought to market.
With oil-related capital investments on the decline it is not likely that the world will be able to meet future demand. Consider this:
1. Minimum required investment schedules needed to increase capacity are not being met: The IEA estimates that in 2007, alone, the world needed to invest $450bn to develop capacity, whereas only $390bn was allocated. Now that prices have collapsed you can bet this investment figure will drop. 2. The oil business is becoming increasingly socialized, with many international governments taking over their industries. This makes production far less efficient. Take Venezuela's production declines as an example. 3. Increasing political risks are decreasing investment decisions domestically and abroad-think "wind-fall profits" tax.
Oil prices currently reflect a dire economic outlook. Markets are discounting the commodity betting that future demand will temper with cooling growth rates. This is certainly true in the near term, but a decade from now we will wake to realize that supply is desperately imbalanced with demand. Oil is a precious resource upon which our civilization is dependent-prices have nowhere to go but up. In the near term oil can be used as a hedge on inflation. it is denominated in US dollars in global markets, and so when the USD decreases (due to inflation) oil prices will increase. Considering that the US money supply has gone up 111% in the last three months this is a reasonable bet! - 15224
About the Author:
Rob Viglione is an author, hedge fund manager, real estate broker, and Humanist. He recently launched Viglione & Partners Assurance Group, L.P., SoCal Real Estate Advisors, Inc., and began The Freedom Factory, where you can read more of his wacky writing.
