Hoping for
higher oil prices?
Be careful what you wish for.
Longtime oil industry observer Roger Herrera
is convinced that high oil prices, though often
omitted in current economic and political
debate, actually drove the global economy into
recession in 2008.
Moreover, the direction crude prices take in the
near future will play a major role in determining
what happens with the economy, Herrera told
Petroleum News
in an Aug. 10 interview.
"It's clear to me that a $150-a-barrel oil was
the trigger for the recession," said Herrera,
who has spent more than 40 years observing oil
prices, initially as a petroleum industry
geologist who started his career in Alaska, and
then work around the world, in places such as
Peru, East and West Africa, Greece, Canada's
Arctic Islands, Columbia, Papua-New Guinea,
Libya and Barbados before returning to Alaska in
1975, where he became increasingly involved in
federal politics of operating in the
northern-most state.Herrera
spent a lot of time in Washington, D.C. on issues
such as offshore exploration and opening of the 1002
area of the Arctic National Wildlife Refuge to
energy exploration. From time to time
in the last decade and a half he has been
interviewed by Petroleum News. Each time, he has
accurately predicted the direction of oil prices.
"The prices put extreme stress on the economy - on
the airlines, trucking companies, even consumer's
pockets," Herrera said in the Aug. 10 interview.
"And if you look at the economic pattern in the
past, you'll see that when the price of oil goes up,
recession follows." The sharply
higher oil prices, "without any shadow of doubt,"
pushed the economy over the edge into recession,
Herrera said. Little has changed in
his ongoing forecast for medium and long term oil
prices. They will surely keep climbing, back to $150
a barrel and likely beyond in the long term, he
said. Why? Because of a number of
factors, including the fact that hydrocarbons
comprise 85 percent of the world energy consumption
and world oil reserves have either hit their peak or
slipped past it into decline. In addition, a growing
world population is bringing its increasing thirst
for oil into play, while alternative energy sources
and transportation fuels are doing little to close
the gap between supplies and demand. Add to this
speculations energy market speculation, which is
exacerbating already intense upward pressure on oil
prices.
Changing Fundamentals
Oil industry analyst and "Twilight in the
Desert" author, Matthew R. Simmons, dubbed 2008
oil's "annus horribillis" in a presentation
earlier this year.
An investment banker specializing in the energy
industry and one of the world's leading experts
on peak oil, Simmons said prices spiked last
year, climbing from $96 to $147 a barrel by
early July, before tumbling 74 percent during
the last three months of the year. He said the
highest oil prices reflected a 15-fold increase
from under $10 per barrel in 1998, and the
three-month plunge late in 2008 took prices back
to November 2003 levels.
On Aug. 18, Bloomberg reported oil was $69 a
barrel, having Oil "advanced 55 percent this
year."
Simmons, who has an MBA from Harvard and was an
energy advisor to U.S. President George W. Bush,
attributed the sharp jump in oil prices over the
past decade to a change in underlying industry
fundamentals. He said oil demand grew by 12.7
million barrels a day. Numerous other factors
also affected oil markets, but overall, crude
supply grew more slowly than demand in recent
years.
Part of the problem may be that no one seems to
have a firm notion of what constitutes a fair
price for oil, Simmons said. As examples, he
cited BP's Lord John Browne's comment in October
2004 that "$27 a barrel oil price is fair,"
Shell's John Huffmeister Jan. 6, 2008 saying
that "$30-45 barrel oil price is fair," and King
Abdullah of Saudi Aramco saying in December 2008
that "$75 barrel oil price is fair."
Murky short-term
outlook
What will happen to oil prices in the short
term? The answer is extremely difficult to
predict, Herrera said.
The variability of oil prices will continue, but
the when and how "is incomprehensible," he said.
"The economy is even incomprehensible. We have a
world recession to deal with. If the next three
to four years is the short term and the next
eight to 10 years is the medium term, then
beyond that is the long term. The real question
is when oil prices creep up again, at what stage
do they trigger another collapse in the
economy," Herrera said.
If the recession ends soon, demand on crude will
put pressure on prices, which would precipitate
a relatively quick jump to higher levels, likely
followed by an even bigger economic crash, he
said.
However, if the economy staggers on another
three to four years, slowly rebounding from the
recession, prices will be manageable until
industrial growth can re-establish itself,
specially in the United States, Herrera said.
Climate change worries
Other variables could affect the timing, if not
the actual outcome of oil price increases,
including public policy, investment in oil
production and conservation.
"The only thing that worries me is that
governments get paranoid and politicians will do
something silly in response to this notion that
greenhouse gases will destroy the atmosphere,"
the analyst said.
This happened around 1999 when European
countries put curbs on CO2 production. "It's
been a decade, and those policies haven't made
an impact on CO2 emissions in Europe. In fact,
CO2 emissions have gone up," Herrera said.
The analysts said he can envision U.S.
politicians doing something similar such as
imposing huge taxes on business in hope of
curbing CO2 emissions and ending up curbing
critically needed industrial growth.
"The extremists say we're going to burn up
because of greenhouse gases, but geologically
that argument makes no sense. The earth has been
much hotter and the atmosphere much thinner in
the past and the earth has survived. Climate
chjange is a natural phenomenon since the dawn
of man and before," Herrera said.
Industry investment
impact
Another concern is a decrease in oil field
investment during the past two to three years.
Herrera said oil fields, especially in foreign
countries, have essentially been left to run
themselves in recent years and as a result,
production has likely has suffered.
"When we come out of recession, we will find
production down, and it will take substantially
more investment for it to go up again," he said.
However, conventional oil and gas production
will continue to decline and unconventional
hydrocarbon sources, which are being used to
replace traditional production sources, will
come with higher costs and inherent problems
that preclude them offsetting the decrease long
term, said Simmons.
While "sustainability" is an industry buzzword
now being applied to oil and gas, Simmons told
an industry audience in June that "it isn't
clear that oil and gas production is sustainable
and it's not clear that the world works if the
industry plan is not sustainable."
Simmons believes world's oil reserves have
already peaked and are now declining. He said
hard data shows the peak occurred in 2005.
It's too late
Whether peak oil is in the recent past or near
future, the decline of world oil supplies is
imminent and inevitable, Herrera said.
"It's too late for huge oil discoveries to delay
peak oil," he said. "The only thing that can
help now is conservation -- at least it can make
a difference in short term."
A very slow recovery from the recession would
not stimulate demand for oil to a great degree
and put pressure on prices. Instead it would
result in stable oil supply/demand conditions,
Herrera said.
If this happens, "it will string out the peaking
of oil," he said. "Prices would be affected only
by inflation plus the impact of moderate growth,
and they could remain under $100 a barrel for a
decade."
Petroleum News Editor's Note:
On Aug. 12, after a two-day meeting, the Federal
Reserve's policy-making committee announced the
recession has ended and issued its most
optimistic assessment in more than a year by
saying the economy appeared to have hit bottom
and was slowly stabilizing, emphasizing
inflation would remain :subdued for some time."
IOC, DIG, UNG, OIL
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