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Page added on June 7, 2012
Citi’s Ed Morse Has A Huge Note Blasting Everyone Who Believes In Peak Oil
In eight years, oil may be trading more or less right around where it is right now.
That’s the call energy economist Ed Morse made in a recent note to clients. The commodities research chief at Citi says he expects crude prices to stabilize around $80-90 per barrel by 2020.
Morse writes that “peak oil biases continue to blind analysts to an emerging oil cycle turning point” and that “unless the end of history has arrived, the long period of price increases that started in the last decade appears to be coming to an end.”
Why are peak oil proponents wrong, according to Morse? He points to the 1980s, when global depletion of upstream oil inventories caused many to believe that the days of abundant oil were drawing to a close, saying this is when peak oil theories “began to dominate thought leadership in the oil sector.”
This next graph explains why. Morse notes that there have only been three years since 1984 where discoveries of new oil have exceeded oil consumption:
Citi
One of those years was 2010, the latest data in the graph. Morse thinks that indicates an important turning point is in the works. He notes that historically high oil prices in recent years have spurred a wave of upstream spending in the oil industry as producers look to cash in, and capital expenditures are now higher than ever (albeit nominally), and Morse says the “upstream spending is all about inventories.”
Here is what the recent oil and gas capital expenditures boom looks like:
Citi
The bottom line on this oil boom is that all of this increased spending means increased supply. Morse explains:
It took some supply shocks to raise both deferred and prompt prices; and the price increase induced a scramble for new supplies via what turned out to be an unprecedented surge in upstream capital expenditures starting in 2003 (see Figure 1). But it took nearly a full decade to start showing results. The results are just starting to provide evidence that the cyclical trough in the petroleum sector has now passed and the global petroleum industry has just started a new phase in which supply is likely to grow robustly.
Morse uses four methods to get to a price of $80-90 per barrel in 2020. The first two he admits are “simplistic” whereas the latter two methods are perhaps more analytically rigorous:
- The first method is long term futures prices. Morse notes that five year forward contracts are currently trading at $85-90 a barrel. But the broad point is that post-2009, after a half-decade of exponential increases, there has been a new, remarkable stability and re-convergence in the $85-90 range,” he writes. “This indicates that the volatility in these prices since 2003-08 is coming to an end, and reflects other factors, including the stabilization of costs, discussed below.”
- The second method is examining the economics of marginal fields. According to Morse, it currently costs around $90 per barrel to procure oil from the most expensive fields.
- The third method for estimating the 2020 price Morse uses deals with unit costs of production. The long term ‘4-to-1’ ratio between wellhead prices and in-ground value of oil, if it holds, “suggests target prices around $65-70/bbl.”
- The fourth and final method, relates deferred WTI crude prices with industry cost indices. Citi has a proprietary index that tracks various indicators like machinery costs to estimate a “fair value” for long term oil prices, and it’s pointing to a price around $85-90 per barrel.
But oil unchanged in 2020? Imagine that.
11 Comments on "Citi’s Ed Morse Has A Huge Note Blasting Everyone Who Believes In Peak Oil"
Johny K. on Thu, 7th Jun 2012 11:54 am
By 2020 oil in DOLLARS will cost around $1000000000000000000000. (if dollar will exist at all)
Have you ever heard the word “Hyperinflation”?
BillT on Thu, 7th Jun 2012 1:15 pm
Economists never look at the real world. Yes, inflation will guarantee that oil will be over $120 per barrel by then and likely over $200. Why? The few countries that will still be exporting oil in 2020 will need those prices to pay the overhead costs plus profit to keep their populace under control.
As for their cost to get…that is very optimistic. More likely wells and drilling materials will be multiples of today’s prices. We could go back to 1950’s prices, if we go back to 1950’s salaries and commodity prices. Not going to happen.
Harquebus on Thu, 7th Jun 2012 3:42 pm
Every time the price of oil encourages exploration and alternatives, the economy tanks.
Grover Lembeck on Thu, 7th Jun 2012 5:34 pm
In the 80’s, oil and gas exploration wasn’t being used to blow a huge investment bubble. Now it is. That makes the situation now different all by itself, never mind the huge (and noted) increase in costs, or the fact that all these “finds” are hard to get, or the fact that fossil fuel companies have everything to gain by estimating on the high side.
Whenever big business can gain by lying, big business lies.
Arthur on Thu, 7th Jun 2012 10:12 pm
Well, if this turns out to be true, we should consider a career move into global warming:
http://deepresource.wordpress.com/2012/06/07/bazhenov-oil-shale-reserves-end-peak-oil-doom/
Keith_McClary on Fri, 8th Jun 2012 4:10 am
Notice the “(albeit nominally)” meaning not adjusted for inflation.
Also population has been increasing.
The curve would be much flatter if it was adjusted for these factors.
SilentRunning on Fri, 8th Jun 2012 7:22 am
Economists and business analysts live in a synthetic universe and almost invariably end up thinking that the menu IS the meal or the map IS the territory.
MikeK on Fri, 8th Jun 2012 7:55 am
Wow, a meaningful prediction coming from a company that didn’t see the collapse of it’s own sector (financial), never mind other sectors. I don’t think I could be compelled to believe anyone who stated back in 2008 “nobody could have seen this coming.” Plenty of people on this site did.
Kenz300 on Fri, 8th Jun 2012 10:26 am
Seems like the rest of the world does not agree with Citi’s assessment.
Auto makers are starting to produce electric, flex-fuel, CNG and hybrid vehicles.
Long haul truckers are moving to LNG fueled vehicles.
Saudi Arabia plans to build solar energy plants in the desert to reduce their internal oil usage.
FedEx, Staples, WalMart, Waste Management and other major corporations are transitioning their fleets of vehicles to a mix of LNG, CNG, and electric powered vehicles.
Individuals and businesses are concerned about high oil prices and the limits of supply. Are they wrong or is Citi wrong?
The too big to fail banks need to be broken up into 2, 3 or 4 smaller banks. Their influence and predictions seem self serving and are suspect.
Windmills on Fri, 8th Jun 2012 4:01 pm
It’s amusing that Ed can be paid as much as he is to ignore the physical realities around him.
Arthur Glenn on Sun, 10th Jun 2012 10:47 pm
Ed Morse as well as other well respected speakers including Ray Leonard and James Hamilton will be at the 2012 Oil Symposium in New York City on June 19th.
It will be interesting to see how much agreement exists among those speakers.