re: THE FUTURE OF OIL
canada.com
IMHO - this is an excellent analysis of the current situation, describes an inflection point..
Link Courtesy of Kerm Yeoman's excellent oilpatch periodical
The future of oil: Crude will reach a critical juncture later this year, when demand consumes nearly every drop of supply. Energy economist Peter Tertzakian warns this is not a time for the lessons of history to be forgotten.
Geoffrey Scotton
Calgary Herald
Sunday, April 03, 2005
CREDIT: Dean Bicknell, Calgary Herald
Suddenly, the west bloc finds it has major competition for oil, says Peter Tertzakian , chief energy economist for Calgary's ARC Financial Corp.
CREDIT: Dean Bicknell, Calgary Herald
Alternative energy won't come to the rescue of a world starved for oil, says Peter Tertzakian
As a student of history, Peter Tertzakian believes the lessons of the past are apparent in today's high oil prices, as crude becomes increasingly precious -- and thus more than ever both a tool and an object of geopolitics.
"Oil is not like cellphones or commercial electronics; this is an essential commodity. If you were to put this on Maslow's hierarchy of needs, you've got food, clothing, shelter -- and energy," says Tertzakian, chief energy economist for Calgary's ARC Financial Corp., a $1-billion energy investment fund.
"The reality is that oil is also a strategic military asset and I think that's lost on some people," he adds. "To think that that's not an issue today is completely overlooking history and reality. It's just the way it is."
The thoughtful forecaster -- he holds a degree in geophysics, a graduate degree in econometrics and a master of science in management degree -- wowed the 1,500 investment analysts and money managers at the annual forecast dinner of the Calgary Chartered Financial Analysts Society earlier this year.
"He is very cerebral and his writing is fabulous," notes Alf Sailer, vice-president of investment banking at Acumen Capital Partners, which Tertzakian helped found in 1995. "What other would take 10 pages to say, he could say it in two."
At the recent dinner, Tertzakian meticulously outlined the strategic power oil has embodied since its use was popularized in the late 1800s, playing a central role in the determining the victors of both the First and Second World Wars and acting as the catalyst for many conflicts. He noted that with the rise of China and its mushrooming thirst for oil, suddenly the west bloc -- most particularly the U.S. and Japan -- has competition as a significant net oil importer.
At the same time, oil use is becoming embedded in the China's burgeoning economy, world oil refining, pipeline and shipping infrastructure is inadequate, strained and aging and, critically, there is no viable replacement for oil on the horizon or likely for at least two generations.
"There's insufficient investment in infrastructure and in new exploration and development to provide enough of a cushion to weather the known unknowns over the next several years," Tertzakian emphasizes.
Nonetheless, he is adamant he is not forecasting doom and gloom, noting the situation will inevitably necessitate some tough decisions around energy consumption, driven by higher prices.
"Price has a wonderful way of doing things in economics. You've got to make choices here and the market will inevitably help people make choices, but it doesn't happen quickly," says Tertzakian, displaying his trademark nervous energy.
"Throughout the history of oil, particularly the last 50 years or so, people have been accustomed to this birthright mentality . . . that we can have cheap and clean and secure and not-in-my-backyard style of energy. What's happening with these prices going up, is it's signalling the end of this birthright. Choices are going to have to be made."
Current and former colleagues of Tertzakian say his emphasis on a larger picture matches exactly his analytical style, noting he rose to prominence because of an ability to write with a concise, engaging and informed style.
"Before he would write about a company he would have a thorough understanding of an industry and the macro-economics that would impact that industry," says Sailer. "He has been brought on over at ARC because they want a bigger picture guy."
Sailer adds that despite his serious demeanour and deep style, Tertzakian has a lighter side, including a taste for snowboarding.
"There's a side to Peter that is very fun. You will not find a guy that is more into cars than Peter, but not old cars -- new cars that have got technology."
As if to accentuate the pressures apparent in the oil markets, Tertzakian's January prediction oil would set a record this year came much earlier than the fourth quarter he then anticipated, when oil punched up to $56.72 US per barrel on March 18.
His forecast that world oil demand will surpass 85 million barrels per day later this year remains on track, although it, too, may come earlier than the last three months of the year he cited in January.
A veteran oil industry analyst, Tertzakian started his career in 1982 as an exploration geophysicist in the oilfields, putting in stops at Hudson's Bay Oil & Gas and Chevron Corp. before deciding to move into financial services in 1990. There his path intersected Acumen Capital Partners, as director of research, and Raymond James Ltd., where he was senior equity analyst and managing director.
Along the way, he developed a passion for energy history, a passion evident in the energy artifacts found near his desk: whale oil lamps, antique light bulbs and electrical insulators are accompanied by a library of books on energy, some of which he read from at January's dinner.
"I think we have a lot to learn by looking back and opening our eyes. Stepping back and taking a look at what's going on is important," says the father of two.
Since joining ARC in 2002 to oversee its strategic research, Tertzakian works out of a corner office high in Calgary's Canterra Tower with an impressive view of the world he studies: the Canadian oilpatch.
"This is a homecoming, in a sense, because it just ties together everything I've learned, all the way from the stuff I've done in the field to what I learned in the finance world, to what I learned as an economist and sell-side analyst -- an oil and gas analyst, a service analyst, an alternative energy analyst. Bringing all those things together really helps me," Tertzakian observes.
Kevin Brown, ARC's chief executive, says Tertzakian has made his mark on ARC, where he helps to manage the 35-employee firm.
"He's a very valued confidant. He is able to combine the cerebral, the analytical, with the broader historical context and the appreciation of the human side of things," says Brown. "It's not just markets and analytics, it's also the psychology, the emotions that drive markets, and behaviours (and) our business is a lot about people."
The native of Edmonton and University of Alberta graduate doesn't believe some alternative energy source will suddenly come to the rescue of an increasingly oil-thirsty world any time soon, in the manner petroleum forcefully supplanted whale oil and coal during the second half of the 1800s.
And that means prices will stay high now and in the future, as the world increasingly focuses on the outlook for the supply of oil and, unlike in the past, not the current supply-demand conditions. That means the days of $30 oil and even $40 oil are gone.
"I think the market has very much a nervousness to it, almost a mentality that 'we need to hoard' and I'm concerned," says Tertzakian. "Drawing an analogy to your car, if your gas tank is full, you're still worried if there isn't enough gasoline at the pump. You're worried about your next fill up. That is the psychology that's going on."
Tertzakian notes that psychology is driving prices higher at a time when inventories are high, the winter heating season is ending and prices should be weakening. It's also creating a global rush to acquire oil concessions by the national oil companies from increasingly powerful nations such as China, India and Japan, that is helping to push reserve prices higher.
"Step back and get a bigger picture perspective of what's going on," Tertzakian says.
With inadequate world refining and transportation infrastructure and demand climbing inexorably, Tertzakian believes the world is in the midst of an energy crunch that isn't going to end any time soon. And he feels the true test will come in the fourth quarter of this year, when demand rises above 85 million barrels per day, a level virtually identical to supply.
The margin will be less than one million barrels per day.
"It is like a manufacturing system that is 98 per cent, 99 per cent utilized. That's the core issue," Tertzakian emphasizes. "The collective oil complex of the world now is over 98 per cent utilized and the market sees that that's not going to get any better. Nuclear power is considered fully utilized around 94 per cent, coal is considered fully utilized around 75, 80 per cent, and a windmill is considered fully utilized around 35 per cent. It is a system that doesn't have a lot of slack."
At that pace, he emphasizes, the world will be consuming oil at close to 1,000 barrels a second and the capacity of a massive project such as Canada's East Coast Hibernia facility would have a life expectancy of days.
"Eleven days and it's sucked dry," Tertzakian observes. "It's quite staggering, if you put in those types of terms. It gives you some scale of the issues."
Even before the new record highs set in mid-March, Tertzakian had amended his expectation of a $43 US per barrel average oil price in 2005 upwards to $47.50 per barrel and believes it will likely go even higher, citing greater-than-expected demand from prominent world economies such as the U.S.'s, India and China's.
Nonetheless, and revealing his bent for -- some would say understanding of -- economics, he remains confident in his belief prices will inevitably bring the market into balance.
"The market eventually will self-regulate, just as it has always done, society and inventors will find solutions. There's always a response; the economy will slow, we'll consume less, we'll alter our lifestyle. The marketplace will sort it out."
gscotton@theherald.canwest.com |
