Why oil is heading to $200+ a barrel
Posted
Nov 10 2008, 04:45 PM
by
Anthony Mirhaydari
Rating:
While economic woes have crude oil trading under $63 a barrel, the International Energy Agency is about to double its long-term price forecast to over $200 by 2030.
The catalyst is the familiar falling supply/rising demand imbalance -- only now it is being exacerbated by the economic downturn. With oil demand expected to fall for the first time since 1983, prices, in the near-term, will likely overcorrect to the downside.
This is great news for downtrodden consumers, but it will lead to higher prices later as oil companies delay or cancel production projects. Once the global economy resumes its brisk growth in a few years, demand will spike, causing prices to soar. Shifts in energy demand happen much faster than shifts in supply so the resulting mismatch will mean much higher prices.
Industry executives are now joining with OPEC to sound the alarm. In its most recent communiqué, OPEC warned that the dramatic oil price collapse -- "unprecedented in speed and magnitude" -- could possibly result in a "medium-term supply shortage." Christophe de Margerie, CEO of French oil company Total, said that lower prices will make it more difficult to develop the energy resources to meet the future demand of countries like China and India.
The Financial Times reports that new projects in high-cost areas like the Canadian oil sands and in the deep waters off Africa's Atlantic coast are already being delayed. This is worrying in light of continued production declines in the world's mature oilfields: From Russia and Mexico, to Alaska's North Slope, well pressures are dropping faster than expected. In the most comprehensive survey yet done, the IEA estimates that current production is declining at a 9.1% annual rate.
These trends caused the organization to focus its forthcoming World Energy Outlook on declining oil production for the first time: "A detailed field-by-field analysis of historical trends and the prospect of a shift in the sources of oil point to a significant increase in future investment just to maintain the current level of production." The price tag is estimated to be $360 billion a year through 2030.
A majority of the investment will focus on state-owned oilfields, especially those of OPEC members like Saudi Arabia, Venezuela, and Iraq. In fact, the share world supply coming from the cartel is expected to increase from 44% to 51% in 2030. Non-conventional resources from Canada will play a big role as well.
The big winners won't be the big western oil majors like ExxonMobil, but the oilfield service companies that will be hired to help drill easy-to-find, easy-to-pump sovereign oil. Top picks include Halliburton, Schlumberger, and Baker Hughes. As for the average American, enjoy the relatively cheap gas prices while you can.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
Related reading:
Why oil prices won't collapse further
Oil ready to move back toward $150
Did the government force down oil prices?
Sky-high Oil: We have been ripped off
