- Rarely do you stumble into places where the information presented contains such a wealth of understanding...These comments are more valuable than the article itself. Recently its becoming more useful to focus on comments....improves characterization. So, check the headline, skip article and go to the comments.....good way to assist in characterization for truth values.....
- RiskManager comments below are worth noting......
these comments contain such understanding, including proper characterization of system layers. Importantly, but absent from the selection below is the awareness by RiskManager that Iraq is poised to produce 10% of worlds daily use needs at wellhead prices of $2.00 per barrel.
RiskManager | July 23 7:04am | Permalink
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- p.s. Forgot my denoument!
If there are plentiful deposits then the answer to the question about long term planning is quite simple.
Don't do it!
If we can get over our tendency to predict impending doom (never really happens does it?) and our control freak instincts to "do something about it" and simply let people research, invest and make profit from delivering the energy the world needs and that the world has, in fact, plenty of, then everything will be fine.
A big part of this "chill" strategy is the spread of democracy and the testing of OPEC quotas by democratic vote. I think OPEC quotas cannot survive democratic vote in the long run as the fundamentals of voting are that people will vote for more today as opposed t more in a decade or two's time. If OPEC quotas are ended then OPEC may produce 80% of global output from its 80% of global conventional oil reserves i.e. at less than half the reserves to production ratio that non-OPEC has delivered every year for 40 years. This would be an additional 30 million bbls a day. Really everyone, chill !
Report RiskManager | July 23 6:54am | Permalink
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Nice article Nick. I must confess to decades of gas, power and oil price forecasting, most of it of no use because of the way it was used.
I like your three methods and yes, in the long run fundamentals will set the price level. I say that prices at any time can be anything but will always revert to the mean as defined by fundamentals. In energy markets long lead times between investment and production and then the marginal economics of shutting in alone create volatility.
Still, option 3 with my mean reverting caveat is still no good. We say "fundamentals" as if this is a rock we can cling to and confidently project into the future, but over the medium to long term fundamentals are unknown. Witness the shale revolution.
So @JohnGalbraith, there will in the future be a supply curve that will deliver additional commercial reserves at production costs that technology will, in fits and starts, drive down. It may well be shale, it may be something else, it will be something. What is known is that there is a truly vast amount of hydrocarbon deposits still in the Earths crust and lying as hydrates on the sea bed. Did you see that the Japanese were recently researching and producing sea bed gas hydrates? These reserves are, well, gargantuan!
Report Motvikten | July 22 7:18pm | Permalink
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@boneman
"one source"
I agree. Please give me a suggestion what you use i UK / EU
I have one i Swedish, and I have the US IEA from Januari 2013. They differ a lot.
Report Boneman | July 22 7:05pm | Permalink
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Bang on Nick. The world is awash with gas like never before. There are issues with getting the right infrastructure in place but those reserves will flow in the 10-year time frame. Nicfk's analysis is simple and based on the fundamentals. The facts as we see them today.
As for comparing costs, I would only ever quote from one source so that the basis are the same - discount rates, treatment of costs, inflation, interest etc. a magic 40% saving for offshore wind over 7 years. I am doubtful.
Report Toffe | July 22 6:56pm | Permalink
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This line of argument is very interesting: fundamentals is the only non-crystal ball approach to forecasting. Might not work short term (where trading strategies rule), but must work medium to long term.
A similar construct as the author can be made for oil, however this is a highly charged topic few want to venture into. The fundamentals are clear: supply will outstrip demand in the medium term (stagnating or shinking economies world-wide) and excluding deus ex machina events (i.e. start a middle eastern war or impose blocade against major producer nation) the price pressure should be rentless all the way down to cost of production. The argument around "cost of reserves replacement is increasing" doesn't apply, since in a demand constraint market the relevant measure is cost of production.
Report The genius | July 22 6:34pm | Permalink
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@John Galbraith Exactly!!
Report Motvikten | July 22 4:13pm | Permalink
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"The sooner public policy adjusts to the new reality the better."
How does Mr Butler suggest the policy should be changed?
Is it UK policy? (In opposition to general EU policy)
What about the suggestion from some EU countries to allow tax payer support for electricity from Nuclear.
(seem UK is one of the countries in favor of this)
Mr Butler, is that OK with you?
FYI
From the latest BP statistical review. (slide 22)
Sept. 2012. EU power generation costs for gas = 5.7 euro cent / kWh and coal 2.5 euro cent / kWh.
From Siemens document "A new spin on production"
On shore wind today 7 euro cent / kWh supposed to be 5 euro cent / kWh in 2020
Off shore wind today 14, and 10 euro cent /kWh in 2020.
Siemens say they will lower the cost by smarter production and less need for service.
Report John Galbraith | July 22 2:42pm | Permalink
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The most important thing, that you haven't really mentioned is the long run marginal cost of new developments. Can European shale, east Africa, eastern Med etc etc be developed at $8-9? Doubtful in my opinion.
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