Reuters blog archive
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Next year could see markets start to wake up to a proper carbon bubble: the inflated value of hydrocarbon-heavy corporates.
Fossil fuel companies may already have found more coal, oil and gas than can safely be burnt without prompting damaging climate shocks. A 2011 report by Carbon Tracker, an environmental think-tank, found 745 giga-tonnes of carbon embedded in the proved reserves of the world’s biggest listed coal and petroleum companies.
That was almost a third more than the 565 giga-tonnes that some of the best available science suggests can be burned before 2050 without running significant climate risks. Add in reserves held by unlisted companies and governments and the embedded carbon figure hits 2,800 giga-tonnes. And that’s just known, recoverable deposits. Prospectors make new finds all the time.
from Global Investing:
Where are the missing barrels of oil, asks Barclays Capital.
Oil inventories in the United States rose sharply last week, with demand for oil products such as gasoline at the lowest in 15 years and crude stockpiles at the highest since last September. Americans, pinched in the wallet, are clearly cutting back on fuel use.
But worldwide, the inventories picture is different -- Barclays calculates in fact that oil stocks are around 50 million barrels below the seasonal average. And sustainable spare capacity in the market is less than 2 million barrels per day. What that means is that the world has "extremely limited buffers to absorb any one of the series of potential geopolitical mishaps." (Barclays writes)
from The Great Debate:
Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.
While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.
from The Great Debate:
-The views expressed are the author's own-
A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the "worst economist in the world".
According to New York Times columnist Krugman "Higher commodity prices will hurt the recovery only if they rise in real terms. And they'll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery".
from The Great Debate UK:
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
It really is hard to resist the temptation to take a hopeful view of Britain’s new government.
Economics, rather than politics, will be the main driver of the fight against global warming in 2010.
In 2009, the global recession had a greater impact than all the diplomatic efforts that ended in the Copenhagen flop: energy production hadn't declined on such a scale since 1981, according to the International Energy Agency (IEA). Here are five economic reasons for the world to become slightly greener in the coming year (just a few of them could be wishful thinking...)
Real life in the energy business has an impressive record of bringing acute disappointment to the pessimists. We're always about to run out, but somehow we never do. Now the latest World Energy Outlook, leaked to the FT a week early, delivers fresh embarrassment their way.
The International Energy Agency has finally noticed the world glut of gas, something my colleague John Kemp has been shouting about for most of this year. Recession, generous subsidies for renewables and improved transportation of liquified natural gas (LNG) have been bad enough, but the real damage to the price has been the discovery of vast quantitites of shale gas in the United States.
from The Great Debate UK:
- Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs. The opinions expressed are his own.-
Argentina should be an object lesson for the U.S.
A century ago, it was one of the richest countries in the world. Today, it has fallen far behind Europe and North America, after a hundred years marked by long periods of recession.
-- John Kemp is a Reuters columnist. The views expressed are his own --
By John Kemp
LONDON, July 27 (Reuters) - The oil market looks set to remain well supplied through 2010.
The huge stockpile of crude oil and refined products now being stored around the world, together with more than 5 million barrels per day (bpd) of spare production capacity, half of it in Saudi Arabia, means the market has a substantial buffer against either supply or demand "surprises".
But a Reuters poll of supply and demand forecasts for 2010 highlights an unusual degree of uncertainty on the outlook as forecasters struggle to assess the combined effect of the deepest recession in 50 years as well as structural shifts in consumption patterns and production costs [ID:nLR342038].
Uncertainty about supply and demand dynamics implies considerable uncertainty about how quickly the market will tighten again. Based on forecasts in the poll, cyclical slack could be absorbed as soon as the end of 2010 or as late as 2012.
The International Energy Agency (IEA), regarded by many as the benchmark forecaster for the oil market, projects crude oil consumption will rise 1.4 million bpd next year, reversing about half of the demand lost in 2008 (0.3 million bpd) and 2009 (2.4 million bpd) but still leaving consumption far below the 2007 peak (86.5 million bpd).
Most growth is set to come from emerging markets (1.3 million bpd) such as the Middle East, China and the rest of Asia with only a marginal contribution from the advanced industrial economies (0.1 million bpd).
But the IEA is the most bullish forecaster in the survey. Others are more cautious. Estimates in the poll put the increase as low as 0.5 million bpd, with an average of just 0.9 million bpd.
Similar uncertainty dominates supply projections. While IEA sees non-OPEC crude production rising 0.4 million bpd next year, other forecasters put growth as high as 0.9 million bpd or see a contraction of up to 0.6 million bpd.
The problem for all forecasters is how to assess the overlay from the largest cyclical variation in business activity and oil demand since the Second World War, as well as structural shifts in both consumption patterns and production costs, on longer-term trends in supply and demand:
(1) LONG-TERM TRENDS
For the advanced industrial economies, oil consumption has been basically stable since 1997. Efficiency gains and the transfer of energy-intensive manufacturing industry to emerging markets have offset increases in GDP and transport demand.
Marginal demand for crude has come almost entirely from emerging markets (up 11 million bpd between 1999 and 2007) especially the fast-growing economies of China, the rest of Asia, and the Middle East. The pattern is consistent with research showing oil demand rises steadily as per capita GDP rises from $5,000 to $20,000 before stabilising.
On the supply side, underlying production from existing fields is falling by around 7 percent a year, according to the IEA. Producers need to bring on almost 6 million bpd of new capacity each year just to ensure output remains unchanged [ID: nLK174997].
Much of the new production involves development of smaller, more expensive fields; often in difficult geological areas or expensive deepwater environments; employing costly techniques to enhance recovery rates (such as water injection); or involves unconventional resources such as Canada's oil sands.
Given enormous resources of conventional oil, bitumen, coal and gas, let alone methane hydrates, there is unlikely to be a real shortage of hydrocarbons for hundreds of years (long after combusting them has cooked the planet, if fears about global warming prove correct). But the industry's rising cost structure means the days of cheap $20 oil are over forever, unless there is a major technological breakthrough in recovery and refining systems.
(2) DEEP CYCLE EFFECTS
Overlaying these trends, the financial crisis has introduced the largest cyclical variation in both economic activity and oil consumption since 1945.
The collapse of world trade has produced sharp declines in diesel and jet fuel consumption [ID:nLL657354]. This demand should return as the major economies start expanding again from Q4 2009 and world trade levels normalise. It will add back hundreds of thousands of barrels per day in consumption next year, but only once high inventories of both jet and distillates have been worked down [ID:nLN322311].
On the supply side, the lasting impact is harder to gauge. While major oil companies have largely protected capital investment programmes, many smaller companies have cut exploration and production development expenditure sharply in a bid to conserve cashflow.
The number of rotary rigs drilling exploration and production wells in the United States has halved since September 2008. For the time being, production has continued to increase, reflecting the lagged effects of the earlier period of high prices in 2004-2008. But past experience suggests the fall in new drilling activity could cut underlying production by as much as 500,000 bpd next year if not quickly reversed.
The same pattern is repeated worldwide. OPEC's capacity is set to rise sharply in 2009 and 2010 as new Saudi fields (Khurais, Shaybah and Nuayyim) planned during the years of high prices finally come online after lengthy construction delays. It will push Saudi Arabia's maximum theoretical capacity to 12.5 million bpd compared with actual current output of around 8.2 million bpd, restoring a generous cushion of spare capacity to the market. But this will be gradually absorbed unless prices are sustained at a level high enough to continue incentivising new investment.
Less clear is whether the price collapse will harm investment in the long-term. Following a rebound, current prices of $60-70 per barrel should be high enough to make most of the investments needed in the short-term economic. But the price gyration itself could make the industry more cautious about committing capital, slowing supply growth over the next 2-4 years and tightening the market by 2012-2015.
(3) STRUCTURAL BREAKS
From the demand side, the shock caused by the earlier surge in prices has led to determined interest in conservation and substitution measures. Because many of these are embodied in legislation, they will not be reversed just because prices have fallen. In the United States, toughened ethanol blending requirements will displace an extra 30 million barrels of crude in 2010, followed by a further 16 million barrels in 2011 and 20 million in 2012.
Price volatility, together with pressure for "decarbonisation" is pushing petroleum-derivatives out of the power stack in favour of cheaper and cleaner-burning natural gas -- as well as non-fossil sources, with heavy investment in windpower and solar systems [ID:nLD829860]. Cheaper prices may slow, but will not reverse, determined efforts to reduce dependence on conventional petroleum.
Meanwhile rising costs are increasing the price-hurdle needed to sustain investment, meet demand growth and compensate for natural field declines. In a sign of the future, BP's state-of-the-art Thunder Horse platform cost $5 billion and extracts oil from three intervals of oil as much as 4 miles below the surface of the ocean at pressures almost 1200 times the earth's atmosphere.
The poll's uncertainty about near-term and future production reflects the growing challenge of maintaining sufficient, risky investment to keep the market adequately supplied, with a cushion of spare capacity, in the face of an increasingly tough technical environment.
from The Great Debate UK:
-Richard Wellings is deputy editorial director at the Institute of Economic Affairs and editor of the IEA blog. The opinions expressed are his own.-
If the Conservatives are elected, as the polls currently predict, they will have to tackle the worst fiscal crisis in peacetime history.