[emersonbiggins]

Link to article in Cincinnati Post here.

$this->bbcode_second_pass_quote('', '
')Long-term oil outlook isn't all bad
By Gwynne Dyer

"We ran out of $2 oil in 1973,'' said Henry Groppe of Groppe Long and Littel, at 79 the oldest active oil consultant (and one of the most respected) in the business. "Then we ran out of $8 oil, then $15 oil. Now we're running out of $40 oil.'' It's a different way of looking at what is happening to the price of oil, and a much more useful one.

Last week the price of a barrel of oil reached $65. Oil has doubled in price in the past 18 months, and oil industry experts freely speculate that the price might hit $80, even $100 a barrel, before year's end, hugely depressing world economic growth.

But here's an interesting fact. Oil companies still decide whether a new field is worth developing by calculating whether they would turn a profit from it when the price per barrel falls to only $25. Do they know something that the rest of us don't?

Not really. They just know that prices always fluctuate, that swings in commodity prices tend to be much wider than in other goods - and therefore that "running out of $40 oil'' doesn't mean that the oil price will never fall below $40 again. It won't stay down there for good, but as John Maynard Keynes once remarked, "markets can remain irrational longer than you can remain solvent.'' You have to be able to make a profit from your new field when oil drops to $30 a barrel (even if it is for the last time) and stays there for a couple of years.

The price of oil may hit $80 or even $100 this year, but if it does it will be an extreme market fluctuation, not a new average price. It will eventually fall back towards the $40-$55 band - but "eventually'' is the key word as far as the current global economic boom is concerned.

Despite low growth in Japan and most of the eurozone, the global economy as a whole grew at an unprecedented annual rate of 4.5 percent over the past 18 months. The rule of thumb says that $20 on the oil price means a drop of 1 percent in global growth six months to a year later, so we aren't in bad trouble yet.

Oil prices have gone up around $30 in 18 months - one and a half percent off the growth rate - but some of that lost growth is already accounted for in that remarkable 4.5 percent figure. If the oil price stabilized now, the world economy would still be growing at a comfortable 3 percent after the rest of the damage feeds through.

If, on the other hand, oil goes up to $100 and stays there for a year or two, that's another 2 percent off the growth rate, and then everybody hurts. The current growth spurt is bound to end sooner or later - they haven't abolished the economic cycle yet - but sharp swings in the oil price don't necessarily mean that we are headed for an especially severe recession.

This is not like the two "oil shocks'' of the1970s, when a sudden constriction in the oil supply drove the price sky-high. This price peak is driven mainly by rapidly rising demand in the emerging Asian economies and in the United States, so their people are still spending and the impact on the global economy is much less.

After all the current turmoil is past, the important thing is that the median oil price for the next half-decade, say (until we run out of all the $40 oil) will be in the mid-$40s. That is good news in terms of the real crisis, climate change.

It's high enough to encourage energy conservation and drive people towards alternative, preferably non-carbon energy sources, but it doesn't actually paralyze the economy. We will need more pressure from a higher price later on if we are to avoid a global climate disaster, but the economy can only respond so fast. And we are practically guaranteed a higher price later on - another doubling of the average price by 2010 or 2012, say - because we are probably at peak oil production right now.

Seventy percent of the world's oil comes from big fields that were discovered before 1970, and they are almost all in decline. The new discoveries are mostly smaller and more expensive to develop, and Henry Groppe recently predicted that oil production worldwide will decline by a million barrels a day each year from now on.

We can take no credit for it, but maybe we are on the best available glide-path for a soft landing on climate change. Whether that will be good enough is, of course, another question.

Gwynne Dyer is a London-based independent journalist.

Publication date: 08-17-2005

[rockdoc123]

First of all he can't be that respected a consultant....his analysis is basically stupid.

As the price of oil rises so does the cost of extracting it. It takes energy to produce energy....what make's it sensible is that you are using up less than you are producing (or the cost of the energy you are using is lower than the cost of what you are producing). With rising oil prices so rises prices for steel (it costs more to create your product) which in turn means casing, tubing, bits etc. all go up in price. Fuel cost to run your rigs rises as well. With rising prices activity levels also increase which means rigs are in short supply and rig rates necessarily rise. As an example in the past 3 or 4 years the day rates for drill ships have about doubled....jack-up rates are rising rapidly. So it just isn't as simple as the price goes up so now it is affordable to produce....basically your margin is not increasing dramatically. As well he misses the point that once you've produced the oil there isn't anything left....demand is till increasing, perhaps at a slower rate but still going up.
My view is we passed $40 oil without stopping to take a breather and the bottom is much higher.

[sjn]

So he believes we're at "Peak Oil" now, yet the prices will fall back to the mid 40s for the next few years??? How can he say we're probably at peak yet it isn't like the 70s where oil production fell? The quotation of Henry Groppe doesn't really fit in with the conclusion of the piece, either growth is going to have to slow down to the level of production growth, as I believe Groppe is saying, or production growth is negative ie. we're at peak now and so the Long-term oil outlook is all bad!

Edit:
I didn't read it carefully enough, Groppe just makes no sense at all. He predicts 1mbpd/year loss of production from now, but that isn't as significant as the '70s oil crisis'?

[MicroHydro]

$this->bbcode_second_pass_quote('', 'W')e can take no credit for it, but maybe we are on the best available glide-path for a soft landing on climate change. Whether that will be good enough is, of course, another question.

[meekoil]

$this->bbcode_second_pass_quote('rockdoc123', 'F')irst of all he can't be that respected a consultant....his analysis is basically stupid.

[gnm]

Financial analysts, economists, consultants, etc drive me crazy - I recently read a long article by one where he states that oil prices can't stay high because they are deviating from historical patterns relative to value and gdp. So basically this guy was saying that it can't go any higher because it didn't in the past. That was when oil was at $57.....


-G

[linlithgowoil]

it really depends on your outlook, whether you think peak oil is a good thing or not.

he is absolutely correct that oil prices won't just keep going up and up until they are, say, $500 a barrel. although oil demand is fairly inelastic even at $60, i can guarantee you oil demand will plummet when it reaches $100+, meaning that the price will come down again.

although oil is not the same as widgets made in a factory, the basic rules of supply and demand still apply - raise your prices high enough, and watch the demand go down - which leaves you with an oversupply of your goods or oil - forcing prices down.

even if peak is this year, i dont see prices ever going much above $100 a barrel, ever. people will simply stop using their cars. Imagine if 50% of the cars worlwide were used only a couple of days a week instead of every day - that would kill millions of barrels of demand every day.

i do admit that the USA is in a crappy position though, well, certain parts of it. basically the low density housing areas where the local shop is 10 miles away, the schol is 15 miles, work is 20 miles, etc etc. That is a problem because you have to drive in these kind of places. But you could always car share, and expect to see public transport become the new must have thing for every town.

Peak oil is good news, i think. Its going to force us to conserve, be efficient, and to find viable renewable energy. Isn't that awesome? We weren't going to do it ourselves anyway.

[Doly]

$this->bbcode_second_pass_quote('linlithgowoil', '
')even if peak is this year, i dont see prices ever going much above $100 a barrel, ever.

[linlithgowoil]

$this->bbcode_second_pass_quote('', 'T')ime will tell if you were right. And I have a feeling we won't have to wait a whole lot of time to find out.

[Dan1195]

Problem with public transport in the sprawl areas is that they are designed for single person car use through chiefly residential areas. Thats the result when you have "home rule" zoning which limits housing to 1 per 1 1/2 or 2 acres in many cases here in Mass. Most stores/workplaces are too far for a homeowner to walk too due to lack of shops/industry. At the same time buses and similar modes of transport wont work here because its too spread out for many people to take advantage of them.

I saw a report on NBC recently about demand destruction in San Fran, LA, more people taking public transit and carpooling, etc, this will work in the cities, but not in suburbia. i.e. conservation will work in the U.S. but only to a point.

[KevO]

$this->bbcode_second_pass_quote('linlithgowoil', ' ')i can guarantee you oil demand will plummet when it reaches $100+, meaning that the price will come down again.

[KevO]

$this->bbcode_second_pass_quote('linlithgowoil', '[') if petrol prices doubled, i'd dump my 35MPG car and get a 60MPG car, and drive less as well. .