Posted by: donmihaihai | January 16, 2008

It is supply and demand, as easy as ABC. Ahmed Zaki Yamani once said.

Ahmed Zaki Yamani who? Saudi Arabia oil minister in the 1970s, a very powerful man, perhaps too powerful that overshadowed the Kings(two in total) which caused his downfall. What was he commenting about? The price of oil, during last oil bubble in early 1980s. Ok, he was the past but as crude oil price soared to the range of USD90 to USD100, it is appropriate to look back, back to history, to see where we are standing today. Had current US president George Bush done that or at least seek advise from his father, Senior Bush who was an oil man for most of his life before becoming the president of US or just political reasons that the US President is urging OPEC to bring down “very high” oil price.

I don’t know but I really hope that he finally know that oil is not a birth right for US and it is not a birth right for Singaporean too, especially for the current working adult where most of us only know oil thru one way, crude oil price or gasoline price at the oil stations. In fact by looking at the slides from Matthew Simmons website, Singapore is one of the fastest growing usages of crude oil in the developed countries. Well, how can we have the birth right if there isn’t any crude oil under our HDB flats? What can we do if oil producing countries decided not to supply oil to Singapore? Go for war? Well, isn’t all the war machines and logistic drink oil? Ask the main players of WW2(not possible of course) and they will tell us that no oil = no war. And that was in the 1940s.

This year, 2008, crude oil price finally reached USD100. Finally because everyone who keeps track or just plainly interested in it were looking forward for it or something of that sort. Where the price of crude oil will be is always being guess, speculate and forecast. So Yamani comment come in handy, it is supply and demand, as simple as that. The exact price is hard to guess but at which price level is easy and it is cause by 3 factors. 1) Supply 2) demand 3) alternative.

Supply

Looking at the inventories is crazy except maybe for trader, it is crazy too to look at what is the projected output from various countries. In supply, we should look at discovery of the number of new giant oil fields, nothing else. Giant oil field, in today must be at least the size of North Seas or better Ghawar(giant of the giant) not those “giant fields” discovered recently, they are smaller, they are of not much use especially in deep sea. For crude oil price to come down, my guess is at least 2 or more giant oil fields of that size must be discover and another number of years to bring them online.

Why is it so? History. The production and political crisis in 1970s to 1980s was solved by North Seas, Alaska’s North Slope and the build up of Mexican giant oil field, not because OPEC decided to stop the plan. The plan to reduce supply and increase price fail badly. The low oil price in 1950s was caused by the discovery of many giant oil fields in Middle East, elephants as they call it after WW2. Further back in the 1930s, flood of East Texas crude depressed oil price and almost destroyed the US oil industry and it was the same further back to John D. Rockefeller times. Huge discovery lead to cheap oil, reduce profitability for oil industry, lesser E & P, increasing consumption and usage. Then demand > supply, price surge, increase profit for oil industry, consumer angry, increasing E&P and new discovery. The only problem we are facing this time is lack of new discovery of giant oil fields. Oil price will never be cheap if this factor does not change.

Demand

Looking at lower oil price due to coming recession(if any) which lead to lower demand is again crazy unless of course for trader. How much lesser demand when recession come? I don’t know but there is even a possibility that demand while not growing is not going to be reducing if recession comes. Don’t throw that possibility out, even if demand drop, it is temporary. But this is not what we should be looking at on demand. But what kind of demand in 3 yrs, 5 yrs, 10 yrs and more. Just by looking at all kind of projection, demand is going up, up and up.

But high oil price does one thing, conservation. But conservation does not seem to be kicking in yet at the current price. For Singaporean, look around for our energy usage habits, it is not changing. Oil price is not that expensive. One more thing is increase in efficiencies due to improve technologies because of high oil price. The main target is of course vehicle. So far, we seem to be moving toward it in small step as in buying smaller car for some but the standard measurement of distance per gallon is not improving as I read from various news. Last oil crisis, the improvement was substantial. It is going to be a long time before we can find out for this time round.

Anyway, as long as the world economy is moving forward for a better life, it is very hard that demand does not increase.

Alternative

Last factor and the most important factor is alternative. We are in a hydrocarbon age and hydrocarbon man. Without hydrocarbon, we won’t be here, it doesn’t matter whether heavy usage of hydrocarbon industries goes from developed countries to which developing countries, and we are using more and more. And gasoline powers our beloved car. Only when there are cheap alternative around, that we can no longer dependent on crude oil or gas. The current development of biofuel, ethanol does not look good. Not sure if we can get real progress out from this area but I am not hopeful.

We need something of bigger scale, stronger, cheaper to make an impact. My hope is that with the current high oil price, scientist, government and VC will make a strong push and some better alternatives will come out. Of all, the most exciting, in term of scale, strong(high octane) and cheap is ocean energy but that is still a long way, not out of scientist labs yet.

So in summary, regardless what is the price of crude oil showing at the spot market, it is going to be high, be it USD50, USD70, USD100 or USD200, it is only where supply and alternative factors being solved we can see the light of cheaper energy price or never.

Peak oil

There is a peak oil group out there who believe that the oil production is peaking soon. I am a believer and read alot on crude oil. My only doubt is when and how it happens. But recently I saw a chart, production chart of crude oil, it is the most scare chart that I seem. It can be found here. http://www.financialsense.com/editorials/casey/2008/0109.html

It does not make sense as oil production is FLAT since 2005 because crude oil price keep increasing, it does not match. It does not make sense too if some cartels out there are controlling production or someone is gathering inventories. The basic demand and supply no longer work or peak oil is really here.

We will know very soon.

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