The Oil Chatter

The Oil Chatter

``Crude oil, once seen as a wealth-creating blessing for mankind, is fast turning into the devil’s tears.” Lutz Kleveman, The New Great Game: Blood and Oil in Central Asia

In view of the prevailing apprehensions about the rapidly rising energy prices, your prudent investor analyst wants to clarify that today’s situation is dissonant from the previous oil spikes such that today’s rise is largely due to ‘demand driven’ rather than supply ‘political’ shocks that had occurred in the past, of course this aside from the ‘supply inelasticity’ factor-not enough supplies to meet demand, where shortage is likely to persist due to the time lag to increase supply. It means that growing prosperity in emerging market economies have largely fueled today’s energy spike!

The pictures and excerpts below from gatewaypundit blog, exemplifies the current oil ‘demand-driven’ dynamics…

``Cars line up to buy petrol at a petrol station in Dongguan, south China's Guangdong province, August 17, 2005. China's southern manufacturing heartland of Guangdong is plagued by closed service stations, fuel rationing and hours-long gas queues. (China Daily)”

``Closed service stations, fuel rationing and hours-long gas queues plaguing China's southern manufacturing heartland of Guangdong are piling pressure on the country's oil majors to boost supply into the loss-making market. (Reuters)”

Again as I have highlighted last week, this is simply part of the unfolding commodity cycle. Yet, as for concerns regarding the ‘peak oil theory’, let me reiterate that the theory suggest that while the conventional or cheaply extracted global oil supplies maybe peaking, there are abundant energy alternatives that can to be accessed PROVIDED the viable price levels.

``We have oil for at least 40 years at present consumption, at least 60 years’ worth of gas, and 230 years’ worth of coal. At $40 a barrel… shale oil can supply oil for the next 250 years at current consumption… All in all, there is oil enough to cover our total energy consumption for the next 5,000 years. There is uranium for the next 14,000 years.” writes, Bjørn Lomborg in The Skeptical Environmentalist.

Let me quote another favorite analyst of mine, Mr. Martin Spring who did a fantastic write up on global energy investments, ``Business Week reported recently how higher energy prices make various non-traditional sources of energy commercially viable, giving these examples:

• Mining the oil sands of Canada and Venezuela is profitable at $25-30 a barrel;
• Oil-from-coal (as produced in South Africa for many years) and making alcohol fuel from sugar (already a big business in Brazil) are profitable processes with oil at $35-40 a barrel;
• Oil from America’s huge shale deposits becomes viable at $40 a barrel and higher.
• New nuclear power stations are already viable in the US, without any subsidies, at only two-thirds the level of current electricity prices.
• Another source suggests that the huge gas-to-liquid plants being built in Qatar to convert natural gas into diesel fuel will be profitable at oil prices above $14 a barrel.
  

This means that at current levels, high cost energy alternatives becomes a feasible option, albeit it will take years(!) to put current investments in these projects on stream.

In the meantime, what we have to worry about is the TRANSPARENCY of OPEC member countries about their ACTUAL PROVEN RESERVES considering that quotas have been issued based on these, from which member countries are thought to have padded up on its reserves to increase quota output allocations. Saudi Arabia for example, according to Matthew Simmons, CEO of Simmons & Company International, a Houston investment bank specializing in energy issues claims that ARAMCO’s last field by-field proven reserves estimates for Ghawar, the largest of the kingdom’s oil field, was made in 1975!

This makes world supplies on ‘razor-thin’ margins vulnerable to supply disruptions arising from simply just any incidents such as typhoons/hurricanes to terrorist strikes to geopolitical bedlams to oil platform fires, etc…

In other words, a meltup ‘shock’ is a bigger probability compared to a meltdown of oil prices due to the structural changes in the global oil dynamics. However we have to keep in mind of the fundamental premises; rising oil prices are part of the unraveling commodity cycle, cheap oil days are gone, the world is not running out of energy alternatives and that demand supply factors or oil/energy economics are the primary determinant of oil or energy prices today.

``Truth, when not sought after, rarely comes to light." - Oliver Wendell Holmes American Physician, Poet and Humorist. 1809-1894