88: Oil supply crunch now on horizon - act now

EnergyInsights.net team

In early August when oil prices were $70 / bbl, we predicted to our website users that oil prices would be $125 / bbl by the end of 2008.

Oil prices today reached $92 / bbl. Oil prices have risen from $20 / bbl in 2001 to $92 / bbl today – which seems like a steep rise. But sorry, “you aint seen nothing yet” – we predict this is just the start of a massive oil price hike. Note we say hike rather than spike. We do not believe they will shoot up then come crashing back down again. We predict they will rise continuously on a see-saw upward trend. October is normally a period of low global oil demand – but when the northern hemisphere winter hits, do not be surprised to see $100 / bbl.

So why are oil prices rising? Simple – supply and demand. Demand is booming with the growth of China, India and other developing countries – each year this increased demand has been revised upwards since 2002. Meanwhile, supply has stagnated. The peak oil supply was October 2006 and we have not produced more since.

OPEC says there is plenty of oil in the system, but meanwhile US inventories took a sharp drop on 25th October 2007 – the early signs of a supply crunch. By October 2008, people wont be talking about a credit crunch or climate change, they’ll be talking about "Peak Oil" and an oil supply crunch.

Our unique analysis indicates that supply will plateau at current levels for the next 5 years – meanwhile demand is rising by 1.3 million barrels per day each year.

We believe there are a number of reasons why oil supply will not increase much further, if at all:

·         OPEC countries can barely produce any more – they expanded investment about two years ago and new capacity will only replace existing declines

·        Even if OPEC could produce more, there is no point creating an artificial supply spike only for levels to dramatically drop off – they probably believe it’s better to let demand rise and feed in reduced supplies – sending prices higher but also preserving stock for future years and generations.

·         Because oil is sold in US dollars and the US dollar has depreciated about 30% in the last year, much of the increase in the oil prices is driven by US currency weakness.

·         National oil companies and OPEC countries are reluctant to let in foreign investment from western or international oil companies – they see few benefits from such collaboration.

·         Banks are reluctant to lend money for large energy projects because lead times are so long with deep cash sinks, costs are escalating, project completion times are slipping, and skills and material shortages make delivering projects on time and budget very difficult.

·         Many countries such as Venezuela and Russia have been taking equity back from international oil companies - a trend set to continue. This will likely lead to less technological advancement for acceleration of oil production - and flatter but lower plateau period. 

·         Very few new large discoveries have been made in the last ten years – hence few opportunities exist to bring on stream new lower cost oil production.

·         Demand in oil exporting nations has doubled in the last ten years as populations have increase by 50% and living standards have increased – these exporting nations also need oil to fuel their own economies – there’s simply not enough to go around!

• Technological advances 3D seismics and wells technology in the 1980s and 1990s have slowed - the easy oil has now been produced. Many of the reserves were accelerated - and non OPEC production has peaked. Remaining oil is expensive, technically challenging and tends to be in hostile and environmentally sensitive areas - environmental pressure are increasing - this will impact the speed by which new production can be bought on stream. 

The future for energy security and supply looks increasing bleak. We have likely already reached Peak Oil (or are very shortly to reach this point). Half the oil found has now been produced and it took 130 years to be produced. But the other half of remaining conventional oil reserves will only take 30 years to produce at existing production rates. A huge gap will soon open between supply and demand – and the only way to close this is for oil prices to sky-rocket and people to switch to other fuel sources. The only problem is – there is no meaningful alternative for vehicles which use 70% of oil supplies. Be prepared to pay double the price petrol-gasoline in the next few years.

The only good news is that so far, the increase in oil prices has not fed through to inflation to any great extent. This has surprised economists. No doubt it has also surprised OPEC countries. It has likely encouraged them to believe that demand will be high even if prices go up – and that if prices rise to say $100/bbl it would not lead to a global recession. So far so good as far as OPEC is concerned.

In 2001, if you’d have asked an economist what effect $100/bbl oil prices would have on the economy, they would probably have said – recession. But now, with global growth at 5% - most people would say – slight slowdown – may be by 0.5% GDP growth. So in a way, oil prices may have to rise to well over $150/bbl before demand destruction takes place. This is why we have been advising all our website visitors to expose themselves in property in oil boom towns and countries. There will be a massive re-distribution of wealth from oil importing nations to oil exporting nations. This is why were strongly advise you read our Special Reports:

• Supply and demand scenarios - oil boom towns
• Investing in the oil/gas/coal boom countries - new Index give latest insights