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Contrarian view on future oil prices

by Minstrel Thu Jun 16th, 2005 at 08:13:43 AM EST

According to Morgan Stanley's Global Economic Forum analyst Andy Xie, Chinese demand for oil decreased 1.2% YoY in the first 5 months of 2005. He believes that current prices are mainly driven by speculation and forecasts that the slowdown of the Chinese economy will result into lower oil prices.

Andy Xie's regular comments on the Chinese economy are well worth reading.

China's oil demand grew by 15.8% in 2004, versus 7.7% in 2003, 6.9% in 2002, and 7.6% per annum between 1991 and 2001.  Last year's extraordinary growth was distorted by China's electricity shortage.  As China's electricity generation capacity catches up with demand this year, demand for oil should decline (see Oil vs. Coal, January 17, 2005).  Despite a 16.3% increase of industrial production in the first five months of 2005, China's oil imports have declined this year.

I believe China's oil imports are likely to decline in 2005 and may fall further in 2006, as China's investment cycle turns down.  

I can understand the argument that growth may slow down after an extraordinary grotwh last year but I'd like to see:

  • proof that electricity production is indeed catching up with industrial production
  • any hint that the Chinese investment cycle is indeed turning down.

In any case, China accounted fro 37% of oil demand growth; that still leaves 2/3 of demand growth unaffected by such Chinese considerations, at a time when it is hard to tell where more oil production will come from.

The high oil prices have triggered an investment boom in oil exploration and the production of substitutes.  Oil sands, LNG, coal liquification and gasification are competitive against oil at US$20-25/bbl.  As fixed investment piles into such alternatives, the energy supply curve has been permanently shifted outward, in my view.  The current investment boom and the production capacity to follow may keep a lid on oil prices for many years to come.

I am sure he means GTL and not LNG, but let's pass... While it is true that these are theoretically competitive at 20-25$/b price does not mean that oil companies are actually investing in these. 20-25$ is the production cost estimate. To make it worthwhile, you need higher LONG TERM oil price hypotheses, which the oil majors are not using as of today for their investment decisions.
There is no investment boom in the sector. Oil majors are barely finding investment opportunities and have returned record amounts of cash to shareholders.
All fields (conventional or unconventional) that will come in production in the next 4 years or so are already known today and do not really bring enough production on line.

It's always interesting to see a cotnrarian view, but this one is hard to follow.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 16th, 2005 at 08:42:02 AM EST
As always Jerome's postings teach me something (after
I Google a bit).  I have just learned a new acronym,
GTL, but would be interested in hearing a bit about
its economics from a competent source (hint).

Hannah K. O'Luthon
by Hannah K OLuthon on Thu Jun 16th, 2005 at 09:32:11 AM EST
[ Parent ]
OK, here is an introduction to GTL technology, which was written by Jerome and originally posted to dailyKos.  It is called How to Make Gasoline from Gas.  

This is the second old link of Jerome's that I've dug up today.  Maybe I should apply to become the Eurotrib librarian.

by corncam on Thu Jun 16th, 2005 at 12:52:07 PM EST
[ Parent ]
Help much appreciated. Thanks!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jun 16th, 2005 at 02:22:50 PM EST
[ Parent ]
Here is another contrary point of view, in an editorial by Arthur Berman of the Houston Geological Society.  Mr. Berman is honest about recent trends in discovery - he admits that we are pumping more than we find each year.  But he seems conflicted, as if he cannot accept the logical conclusion of his data.  Here is a typical quote:
Petroleum is abundant and will be an economically important commodity for a long time.  What is certain is that the cost of petroleum will increase as it becomes scarcer. Peak oil thinking does not account for systemic changes in oil consumption as prices increase or for new reserve additions through exploration or field growth. It does not consider advances in technology either in exploration or production, or in consumption efficiency.

Although I disagree with his conclusions, his article has interesting historical graphs.

by corncam on Thu Jun 16th, 2005 at 12:06:22 PM EST
I think that Berman's viewpoint most correctly reflects economics. As it gets harder to find oil, the price will go up. As the price goes up, replacements will be found. For example, driving less, or solar heating, or nuclear power. This will allow demand to moderate.

The issue is how the transition rolls out, either as an abrupt crisis or as a decade-long change in lifestyle...

by asdf on Thu Jun 16th, 2005 at 01:45:44 PM EST
[ Parent ]
...it will depend on how we react to the changes... Will it be wars fighting over the dwindling resource or those decade long lifestyle changes, many of which should have ended YEARS ago or never even started... like long single passenger commutes so common in North America...

We'll see.

"On the Internet, nobody knows you're a dog." - Peter Steiner

by dryfly (jjwhodat at hotmail dot com) on Thu Jun 16th, 2005 at 02:46:43 PM EST
[ Parent ]

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