Email of the day (2)
"A blog on the FT website regarding new sources of oil that may be of interest to the collective - conclusion: don't necessarily extrapolate the US experience to the rest of the world due to political factors."
David Fuller's view Thanks for this interesting
article. I have posted it in the Subscriber's Area but here is an excerpt
from the Executive Summary:
Contrary
to what most people believe, oil supply capacity is growing worldwide at such
an unprecedented level that it might outpace consumption. This could lead to
a glut of overproduction and a steep dip in oil prices.
Based
on original, bottom-up, field-by-field analysis of most oil exploration and
development projects in the world, this paper suggests that an unrestricted,
additional production (the level of production targeted by each single project,
according to its schedule, unadjusted for risk) of more than 49 million barrels
per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for
2020, the equivalent of more than half the current world production capacity
of 93 mbd.
After
adjusting this substantial figure considering the risk factors affecting the
actual accomplishment of the projects on a country-by-country basis, the additional
production that could come by 2020 is about 29 mbd. Factoring in depletion rates
of currently producing oilfields and their "reserve growth" (the estimated
increases in crude oil, natural gas, and natural gas liquids that could be added
to existing reserves through extension, revision, improved recovery efficiency,
and the discovery of new pools or reservoirs), the net additional production
capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity
of 110.6 mbd by that date - as shown in Figure 1. This would represent the most
significant increase in any decade since the 1980s.
I
find this plausible and more or less in line with Fullermoney's long-term forecast
for energy supplies.
However,
Nick Butler who has plenty of oil-industry experience after 29 years with BP,
is considerably more cautious in his reply
on behalf of the FT.
Long-term
forecasts of this type inevitably include a considerable amount of creative
guesswork and often wishful thinking, particularly regarding trend extrapolation
as every experienced investor knows.
So let
us take a look at the major known supply variables: 1) following the 'peak oil'
scare of earlier decades we now know that vast quantities of shale oil / tight
oil can be developed commercially, although there is plenty of controversy over
the methodology, not least concerning fracking; 2) similarly, these same techniques
have been producing natural gas from shale formations, and gas is emerging as
a favoured fossil fuel because it burns more cleanly than oil, let along coal;
3) we know that the latest technologies can commercially extract oil from fields
previously believed to be dry or inaccessible; 4) we also know that solar energy
is at the forefront of a massive, worldwide and government subsidised drive
to create renewable sources of energy, and their contribution to supply can
only increase; 5) lastly, new nuclear has the proven potential to be a major
source of clean energy, although it remains controversial.
For demand
variables, we need to rely mainly on trend extrapolation; 1) oil consumption
has plateaued in OECD countries, partly due to the factors mentioned above and
also because of weak GDP growth; 2) so-called emerging market consumption of
oil is surging in line with their GDP growth, rising populations and rapidly
increasing middle classes; 3) all evidence to date suggests that populations
in these growth economies aspire to the same energy-consuming lifestyles that
we take for granted in the west.
The known
unknowns that are likely to affect oil supplies and particularly energy consumption
are: 1) global GDP growth; 2) governance; 3) regulation; 4) wars; 5) climate
change.
The above
is really an outline to which subscribers may wish to add or subtract factors.
The weighting given to each of the above is certainly debatable, not least in
an ever changing world. Therefore your guess is as good as mine.
My view
is that the price of crude oil will continue to fluctuate because it is a freely
traded commodity. Surges in the oil price (Brent
& WTI) will remain a headwind for
global GDP growth, with upward spikes causing recessions or at least slower
economic growth, as we most recently saw in 2008, 2011 and earlier this year.
Conversely, lower oil prices will continue to support economic recovery and
growth, subject to monetary policy, as we recently saw in 2009/10 and will hopefully
see before yearend 2012.
Nevertheless,
when I weight all this up, in an uncertain world, I remain hopeful that energy
supplies, including crude oil, will outstrip demand more often than not in future
years, generally underpinning better GDP growth than we see today. As a 'glass
half full' person, I also think that the accelerated rate of technological innovation
that we are witnessing will continue. Thanks for this interesting
article. I have posted it in the Subscriber's Area but here is an excerpt
from the Executive Summary:
Contrary
to what most people believe, oil supply capacity is growing worldwide at such
an unprecedented level that it might outpace consumption. This could lead to
a glut of overproduction and a steep dip in oil prices.
Based
on original, bottom-up, field-by-field analysis of most oil exploration and
development projects in the world, this paper suggests that an unrestricted,
additional production (the level of production targeted by each single project,
according to its schedule, unadjusted for risk) of more than 49 million barrels
per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for
2020, the equivalent of more than half the current world production capacity
of 93 mbd.
After
adjusting this substantial figure considering the risk factors affecting the
actual accomplishment of the projects on a country-by-country basis, the additional
production that could come by 2020 is about 29 mbd. Factoring in depletion rates
of currently producing oilfields and their "reserve growth" (the estimated
increases in crude oil, natural gas, and natural gas liquids that could be added
to existing reserves through extension, revision, improved recovery efficiency,
and the discovery of new pools or reservoirs), the net additional production
capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity
of 110.6 mbd by that date - as shown in Figure 1. This would represent the most
significant increase in any decade since the 1980s.
I
find this plausible and more or less in line with Fullermoney's long-term forecast
for energy supplies.
However,
Nick Butler who has plenty of oil-industry experience after 29 years with BP,
is considerably more cautious in his reply
on behalf of the FT.
Long-term
forecasts of this type inevitably include a considerable amount of creative
guesswork and often wishful thinking, particularly regarding trend extrapolation
as every experienced investor knows.
So let
us take a look at the major known supply variables: 1) following the 'peak oil'
scare of earlier decades we now know that vast quantities of shale oil / tight
oil can be developed commercially, although there is plenty of controversy over
the methodology, not least concerning fracking; 2) similarly, these same techniques
have been producing natural gas from shale formations, and gas is emerging as
a favoured fossil fuel because it burns more cleanly than oil, let along coal;
3) we know that the latest technologies can commercially extract oil from fields
previously believed to be dry or inaccessible; 4) we also know that solar energy
is at the forefront of a massive, worldwide and government subsidised drive
to create renewable sources of energy, and their contribution to supply can
only increase; 5) lastly, new nuclear has the proven potential to be a major
source of clean energy, although it remains controversial.
For demand
variables, we need to rely mainly on trend extrapolation; 1) oil consumption
has plateaued in OECD countries, partly due to the factors mentioned above and
also because of weak GDP growth; 2) so-called emerging market consumption of
oil is surging in line with their GDP growth, rising populations and rapidly
increasing middle classes; 3) all evidence to date suggests that populations
in these growth economies aspire to the same energy-consuming lifestyles that
we take for granted in the west.
The known
unknowns that are likely to affect oil supplies and particularly energy consumption
are: 1) global GDP growth; 2) governance; 3) regulation; 4) wars; 5) climate
change.
The above
is really an outline to which subscribers may wish to add or subtract factors.
The weighting given to each of the above is certainly debatable, not least in
an ever changing world. Therefore your guess is as good as mine.
My view
is that the price of crude oil will continue to fluctuate because it is a freely
traded commodity. Surges in the oil price (Brent
& WTI) will remain a headwind for
global GDP growth, with upward spikes causing recessions or at least slower
economic growth, as we most recently saw in 2008, 2011 and earlier this year.
Conversely, lower oil prices will continue to support economic recovery and
growth, subject to monetary policy, as we recently saw in 2009/10 and will hopefully
see before yearend 2012.
Nevertheless,
when I weight all this up, in an uncertain world, I remain hopeful that energy
supplies, including crude oil, will outstrip demand more often than not in future
years, generally underpinning better GDP growth than we see today. As a 'glass
half full' person, I also think that the accelerated rate of technological innovation
that we are witnessing will continue.