Get used to $30 oil it's here for awhile
By MICHAEL J. ECONOMIDES and RONALD E. OLIGNEY
Oil is headed for a $40 per barrel spike over the next few months. This may be the necessary wake-up call for the next generation of massive investment in the international petroleum industry.
It is apparent that the public, several governments in both the consuming and producing countries, and certainly Wall Street have yet to believe that $30-plus oil is real, that it is here to stay and, in fact, can go considerably further up.
This disbelief has caused a profound slowdown in investment at both multinational and national oil companies. The signs are evident: Until last week, service company stocks were languishing; petroleum companies are spending their current large cash flows to buy back their stock rather than invest in drilling and advanced petroleum exploitation.
What caused this situation has been obvious from the beginning. Last year's $11 per-barrel oil was an unmitigated catastrophe in a number of ways.
First, the reduced production rates of petroleum producing countries actually rationalized significant reductions or the shutting down of customary reinvestments in drilling and well construction. Depletion, a normal feature of all oil fields, took its toll to the point that -- with the possible exception of Saudi Arabia -- last year's Organization of Petroleum Exporting Countries quotas have now become difficult-to-achieve targets.
Second, in some major petroleum countries, not just OPEC but also Mexico, Russia and even Norway, the 50 percent reduction in their cash flow for more than a year will affect petroleum reinvestments for three to five years. Increased national revenues, heavily dependent on surging petroleum prices, are already spoken for in social spending. It just happens that the dominant supplier of crude oil to the United States is Venezuela -- a country with an emphatically populist president which was the scene of major natural disasters recently.
Third, the notion of "excess capacity" in petroleum exporting countries has spawned an international mythology that has affected both the public and government officials; the latter ought to know better.
The notion of excess production capacity, which in the public mind has been tantamount to the kitchen faucet -- you open it you get more water or oil; you close it a bit to get less, but you can open it up again later -- is naive but also potentially dangerous. It is naive in that it misses a critical point: While Saudi Arabia, Iraq and Iran each have the potential resources to produce an extra million barrels per day over their current levels, there is a need for $4 billion to $8 billion of investment in drilling, well construction and advanced production techniques for each increment.
The ignorance of how oil is produced is also dangerous because it may precipitate government overreaction.
Fuel-oil costs in the Northeast and upper Midwest and the escalating gasoline and jet fuel prices have generated calls from some legislators and consumer groups for the government to use the nation's Strategic Petroleum Reserve to stem the trends. Such a measure would be ineffective and counterproductive, galvanizing OPEC's resolve and throwing a wrench at market forces that, if left alone, will eventually correct the situation.
We have estimated an equilibrium price of oil around $20 per barrel, which will be reached eventually. Such an equilibrium price will require at least enormous investments over the next two to three years.
The jolt of a $40 spike in oil price is necessary to generate the investment. If it happens soon, it will put the petroleum industry in a reasonable position in the capital markets, which are now dominated by the "dotcoms" and other such technologies. Rapid transition to a more normal energy scene may also eliminate or reduce the duration of any economic slowdown or even recession, linked to very high and sustained oil prices.
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Above article from the Houston Chronicle, chron.com
Economides and Oligney are professors at the University of Houston and authors of the newly released book, The Color Of Oil: The History, the Money and the Politics of the World's Biggest Business, available from the publisher at colorofoil.com
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Pretty wild stuff! So glad I kept my TMR, and have been buying PANA like crazy recently.
Each are primarily natgas producers but have significant exposure to oil prices.
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