Monday, June 9, 2008

Oil headlines

The 2008 oil fright is continuing and we are seeing signs of volatility in the oil market itself and this likely presages a sell off in the price of oil which is rather welcome. We needed this price to get everyone’s attention. That accomplished, we now need a long period of price stability while demand is lowered and a vast redeployment of capital resources is put in motion. A price retrenchment to below a $100 is now in the works and is much more likely than any further advance. Much more importantly, the consumer is spending on ways to reduce the pain and this will cause a sharp lowering of USA oil consumption possibly beyond what anyone ever imagined possible.

I now expect that the conversion by the trucking industry to LNG engines will be precipitous in spite of the current distribution difficulties and the need to accelerate access to supply. Now that all minds are focused, it is possible to shed two to four million barrels of daily oil demand over the next four years. Yes this is optimistic, but the need is seen as dire and the effort will be there.

Recall that this price advance has not been driven by a shock of some sort. It has been driven by tightening supplies and the revealed inability of suppliers to crank up volume anywhere. That meant that the price had to go to a level were it became everyone’s business to cut down usage. At some point, the hole in your wallet sparks reaction. We have now clearly reached it and a full blown effort to reduce demand is now underway.

A shock may still arrive to run the price up to much higher levels, but I do not see many opportunities there. Besides, the retreat of the US dollar can only go so far as a way to balance the pressure and only hastens the day that other currencies take on reserve currency status.

What we cannot evade is that the current level of oil production at 87,000,000 bpd is likely as good as it gets and that this is terribly vulnerable to declines that are not easily replaced, although THAI promises to handle all that if we have enough time. Nothing else will do it.

This means that increased demand and some historic demand must be covered by other energy sources. The simplest but more inconvenient LNG can bridge this demand for a long time. It will certainly be having its heyday. On the other hand it is necessary. We simply cannot convert to anything else at sufficient speed.

I have already pointed out that cattail culture is capable of producing a cornucopia of ethanol as compared to any other biological pathway we have investigated. The sheer logistics are daunting. It would be better to properly encourage it and then allow it to roll out naturally, until all transportation fuel is ethanol. If every farmer took up the challenge today, it would still take at least a decade to make the easy stuff happen and a century to do the rest.

The fact is that we have options that sound policy can unleash.

What we do not have is a way to substantially stave of pending large field declines except by replacing such declines by fresh production using THAI on heavy oil reservoirs. This technology seems to be working in Alberta and will open up a major new class of field. It will still take a lot of time and as I have posted earlier, I think that we are confronting a production swing approaching 20,000,000 bpd over the next decade. And I am trying to downplay the scale of change hitting us, and hoping that is not really true.

That means energy will be in the headlines continuously from now on. Get used to it.

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