RandomGuy
11-07-2008, 02:02 PM
Well prepared
Nov 6th 2008
From The Economist print edition
Oil prices have plunged. Another spike may be on its way
WITH the price of crude mired at half the peak of $147 it reached in July, this may seem like an odd time to invest in oil wells. Despite trimming its output along with other members of the Organisation of the Petroleum Exporting Countries (OPEC) in an effort to prop up prices, that is just what the United Arab Emirates plans to do. Short-term price movements, its oil minister insists, should not distract from the world’s enduring thirst for oil. Indeed the collapse of oil prices, one of the few reasons around for economic cheer, may be setting the stage for another spike.
Just now oilmen are focused on the rapidly slowing demand for their product. Since early October, reckons the boss of BP, a big oil firm, America’s consumption of crude has fallen by perhaps 2m barrels a day, or about a tenth. Sales of cars in America fell even more steeply last month—by 32%. There is also gloomy news from emerging markets, which have been the driving force in the oil markets of late. Demand for oil is growing much more slowly in China and India, for example, and car sales are down in both countries. There is even talk of global oil demand falling next year, for the first time since 1991.
In the face of these grim statistics, OPEC decided last month to pump 1.5m fewer barrels a day (about 2% of global consumption), starting from November 1st. Several of its members want another cut soon. The output of big Western oil firms is also declining, thanks to decreasing output from their existing fields and a relative dearth of new opportunities to replace them. Production continues to fall in once-prolific spots such as Russia, Mexico and the North Sea. So far, faltering demand has outweighed feeble supply, keeping the price near $70 a barrel.
That is below the level needed to justify further investment in the expensive projects open to Western oil firms, such as extracting oil from the viscous tar sands of Canada. The boss of Total, another big oil firm, puts the cost of developing new tar-sands operations at $90 a barrel. Naturally enough, several firms have delayed planned expansions and cut investment budgets. Some refiners are following suit.
The cost of production is no more static than the price of oil. Falling prices for important raw materials, such as steel and natural gas, should help to bring down development costs. By the same token, the cost of hiring some kinds of drilling rigs is falling. The strengthening dollar also helps, points out Paul Sankey of Deutsche Bank, since that tends to increase oil firms’ dollar-denominated revenue relative to expenses in other currencies.
But according to Francisco Blanch of Merrill Lynch, the rising cost of capital is likely to outweigh all these benefits. Tar-sands schemes, like most oil projects, are very capital-intensive and so very sensitive to changes in financing costs. He believes that higher borrowing charges could push the cost of new tar-sands developments as high as $150 a barrel by 2010. So if demand for oil has started growing again by then, and if tar sands remain the source of marginal production, then the oil price will have to rise back to this summer’s levels to stimulate increased supply. “The age of easy oil”, warns the Emirati minister, “is gone forever.”
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It is worth noting here again that both Mexico and Russia have seen declines in production in 2007-2008 even when the price of oil was over $100/bbl
Nov 6th 2008
From The Economist print edition
Oil prices have plunged. Another spike may be on its way
WITH the price of crude mired at half the peak of $147 it reached in July, this may seem like an odd time to invest in oil wells. Despite trimming its output along with other members of the Organisation of the Petroleum Exporting Countries (OPEC) in an effort to prop up prices, that is just what the United Arab Emirates plans to do. Short-term price movements, its oil minister insists, should not distract from the world’s enduring thirst for oil. Indeed the collapse of oil prices, one of the few reasons around for economic cheer, may be setting the stage for another spike.
Just now oilmen are focused on the rapidly slowing demand for their product. Since early October, reckons the boss of BP, a big oil firm, America’s consumption of crude has fallen by perhaps 2m barrels a day, or about a tenth. Sales of cars in America fell even more steeply last month—by 32%. There is also gloomy news from emerging markets, which have been the driving force in the oil markets of late. Demand for oil is growing much more slowly in China and India, for example, and car sales are down in both countries. There is even talk of global oil demand falling next year, for the first time since 1991.
In the face of these grim statistics, OPEC decided last month to pump 1.5m fewer barrels a day (about 2% of global consumption), starting from November 1st. Several of its members want another cut soon. The output of big Western oil firms is also declining, thanks to decreasing output from their existing fields and a relative dearth of new opportunities to replace them. Production continues to fall in once-prolific spots such as Russia, Mexico and the North Sea. So far, faltering demand has outweighed feeble supply, keeping the price near $70 a barrel.
That is below the level needed to justify further investment in the expensive projects open to Western oil firms, such as extracting oil from the viscous tar sands of Canada. The boss of Total, another big oil firm, puts the cost of developing new tar-sands operations at $90 a barrel. Naturally enough, several firms have delayed planned expansions and cut investment budgets. Some refiners are following suit.
The cost of production is no more static than the price of oil. Falling prices for important raw materials, such as steel and natural gas, should help to bring down development costs. By the same token, the cost of hiring some kinds of drilling rigs is falling. The strengthening dollar also helps, points out Paul Sankey of Deutsche Bank, since that tends to increase oil firms’ dollar-denominated revenue relative to expenses in other currencies.
But according to Francisco Blanch of Merrill Lynch, the rising cost of capital is likely to outweigh all these benefits. Tar-sands schemes, like most oil projects, are very capital-intensive and so very sensitive to changes in financing costs. He believes that higher borrowing charges could push the cost of new tar-sands developments as high as $150 a barrel by 2010. So if demand for oil has started growing again by then, and if tar sands remain the source of marginal production, then the oil price will have to rise back to this summer’s levels to stimulate increased supply. “The age of easy oil”, warns the Emirati minister, “is gone forever.”
------------------------------------
It is worth noting here again that both Mexico and Russia have seen declines in production in 2007-2008 even when the price of oil was over $100/bbl