Another Peak Oil Alarmist
The International Energy Agency (IEA) warns that the recent oil price collapse has triggered a significant decrease in exploration and and new field development. In essence, market players are using market information (price decline) to signal that there is already enough supply capacity to satisfy demand for the coming decade or so.Well, the IEA seems to think that recent market information has provided the exact opposite feedback needed to ensure the world’s future energy needs are met. How does this impact you and your portfolio?
There is good reason to suspect a peak oil scenario in the relatively near future. The majority of the world’s oil comes a few old fields whose output is already declining. In Twilight in the Desert, Matthew Simmons shows how the world’s largest oil producer, Saudi Arabia, is likely obscuring its reserve data and hiding the fact that its biggest fields are experiencing peak production.
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. Required investment schedules needed to increase production are not being met: The IEA estimates that in 2007, when oil prices were rising, the world needed to invest $450bn to develop capacity, whereas only $390bn made it. With collapsing prices you can bet this figure will decrease substantially. 2. Increased international government control of the oil business is eroding efficiency. Look at Venezuela’s production declines as an example. 3. Political risks are decreasing investment decisions domestically and abroad-think “wind-fall profits” taxes.
Prices are down in the short term because of a slumping economic outlook. At some point international commerce will recover and we will realize that we have a dire oil problem. When this happens prices will skyrocket. If you lack the risk tolerance to make blatant long bets on price appreciation, at least do yourself a favor and hedge this risk out of your portfolio.
Rob Viglione on November 21st 2008 in Environment
