More on the GLUT.
Got up this fine Easter morning, opened the Houston Chronicle to the editorial section and was greeted with the following. (Who says there's no Easter Bunny?)
"Looking at $30-a-barrel oil by end of the year
By MICHAEL J. ECONOMIDES and RONALD E. OLIGNEY
Alamists, heralding real or imagined calamities, have always been around the energy scene. This past week, pundits talked of the looming $1.50-plus per gallon gasoline whose price shot up with the highest increase "since the Persian Gulf War." These are the same people who only last month, in the time of the "oil glut," perhaps did not realize that 79-cent gasoline was a more striking aberration, what with $4 gasoline an accepted part of life elsewhere around the world.
At the other extreme, the "isn't-the-government-bling and isn't-the-public-stupid" Cassandras, often with transparent motives, have already predicted an impending catastrophe.
Amid all of the cacophony, there is an important story to tell. The low oil prices of last year are propelling the United States rapidly into what others will call an "energy crisis," but what we call a bull run in energy: $30-a-barrel oil by year's end.
Petroleum supplies for the United States, by far the world's largest consumer, come from a number of sources, with two highly opposing poles. First, there are 10,000-plus independent producers who have redefined the terms efficiency and entrepreneurship in this country, making profit out of wells that are unthinkable elsewhere: five barrels per day of oil. Yet, $12-per-barrel oil served to shut in hundreds of thousands of these wells.
On the other extreme are suppliers such as Saudi Arabia and Venezuela with wells that can deliver thousands of barrels per day of oil. Yet, the costs of activating their fields are some of the highest in the world: $3,500 per barrel per day of sustained production in Venezuela (e.g. $5 million in construction costs for an oil well with initial stabilized production of 1,500 barrels per day), almost three and one-half times the costs in the Gulf of Mexico (i.e. closer to $1.5 million for the same well).
Ironically, both U.S. independent producers and the most prolific countries require the $20 barrel of oil.
All too often, "analysts" with pointed ignorance of the oil business and its physics, make reference to Saudi Arabia's presumed ability to flood the market with $5-per-barrel oil. While it makes for an interesting fantasy, this is a practical impossibility. It would take $100 billion and four to five years to open these proverbial floodgates, something the Saudis can ill afford, either financially or politically. Only after they help to stabilize oil prices and shore up their wavering fiscal situation may the Saudis consider the next decade.
The truth is that while recent low oil prices will soon be forgotten, the dramatic structural changes triggered by them will spawn both short-term (one to three years) and more long-term, profound market-shaping events for the next decade and beyond.
Next year, with a ripple effect lasting possibly several years, we will endure a "sort-of" energy crisis that will touch many of the world's economies. The cost of additional production -- what we have called activation or re-activation cost -- will become the excruciating fundamental that will drive the price of oil to $30 per barrel and even higher. Energy stock prices will rise and the U.S. economy will slow as the oil price searches for a sub-$20 equilibrium. The faster oil prices rise, the more shallow and of shorter duration the price spike will be.
In the long term, akin to a grand Monopoly game that has turned out lopsided, those with all of the money -- recently merged Exxon/Mobil, BP/Amoco and now Arco, and Royal Dutch Shell -- will ultimately have to make a deal with those who have all of the land: Saudi Arabia and a very few others. By inviting a $100 billion investment from the obvious Big Three suitors, the Saudis would siphon massive investment dollars, not only from out-of-the-way spots such as the ex-Soviet Muslim republics, but also from prime areas such as Venezuela and the U.S. Gulf of Mexico. Then, and only then, 10 years from now, would the Saudis be positioned to supply the world with oil priced at $10 per barrel, or less, indefinitely.
There is no need for alarm. The Saudi-dominated oil scenario will play out with an already-started shift from oil to natural gas as the basic energy component of the U.S. economy, complemented by emerging technologies. Unwittingly, the $20-per-barrel price that the Saudis need today will rationalize and pay outright for this conversion.
What should President Clinton do about this? Nothing. All of this is good for the United States, good for the world economy and good for the environment.
What should ordinary people do? Buy energy stocks, for one thing. They will take off like a rocket."
Regards. |
