I’ve been getting a lot of calls and e-mails from people asking about the falling prices for oil in recent weeks. The immediate explanation is that world economic activity is decelerating. Demand is falling. OPEC announced cuts in output. But the markets still believe that economic decline will trump the ability of OPEC to prop up the price of oil. Enjoy it while it lasts.

Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that “Current global trends in energy supply and consumption are patently unsustainable.”

There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. “It is,” as our Arab friends like to say, “written.”

The IEA performed a comprehensive study of 800 of the world’s largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That’s an average. We see depletion rates in excess of 15% in Mexico’s Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there’s no reason why it won’t), the base of world oil output could conceivably dry up within seven-10 years.

Don’t get me wrong. The world won’t run out of oil in seven-10 years. That’s not how it works. It’s just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman’s noose around the collective neck of the oil-consuming world. We might not quite realize it, but when it comes to oil, we are all walking that long green mile.

The investment angle for OI is that the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas, should profit in the future. Yes, the portfolio is down. It has been a hard hit to everyone (me too) who bought into the market up until midsummer. We’ve all lived through a midsummer’s nightmare on this one.

So how long will we have to wait for this “future” to show up? Well, how long will the current worldwide recession last? I don’t know. But I do know that many energy companies in the OI portfolio are at long-term lows in share price. If you can afford to be patient with your funds, these firms should eventually stage a comeback as oil prices rise again. As I said above, “It is written.”

Says who, you ask? Written by whom? Well, how about the IEA? According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

What do I mean by “other kinds” of hydrocarbon substances? Fortunately, there are many different kinds of hydrocarbon molecules out there. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I’m just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the nonoil forms of carbon is affordability. That is, are people willing to pay? It takes a lot of steel and technology to transform some kinds of carbon into something we want to use. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input – all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel. And the whole thing emits lots of carbon dioxide (CO2) in the process, as well.

The other big problem is whether or not there is the political will to “do carbon.” Will the governments of the world allow – let alone promote – industry to invest in the industrial base that will be required to transform the varying kinds of carbon into something that the world can use? Because the other side of this coin is ever-increasing CO2 emissions, global warming and climate change. The more carbon that gets burned, the more CO2 that goes up the flue and into the atmosphere. In essence, within about two centuries, mankind is undoing the geological work of tens of millions of years.

This is not a “global warming” article. But most nations of the developed world have governments that are more and buying into the global warming thesis more. The political gun sights are on carbon. But if we collectively decarbonize the economy, the energy supply will dry up and we’ll wish for the “good old days” when we had to worry only about Wall Street crashing. And besides, try telling the developing world not to develop. People have fought wars over lesser issues.

Do you want some numbers on hydrocarbon resources? Here are estimates of the total hydrocarbon resources in the world and the relative costs to convert them. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time, but only if the world collectively decides to utilize the resources. If not? Well, you had better own some gold too.

The stark assessment from the IEA described above comes just as much of the world’s banking and finance system lies in ruins. Many forms of lending have dried up, and much of the former system of world commerce is just not functioning.

So the politicians, bankers and investors of the world – including us – have their work cut out.

Source: Unsustainable Energy Trends

In Russia, they elect the former president of Gazprom as president of the country.

Hmmm… Russia or the USA… Which country does not have an “energy crisis?”

“People we represent are hurting,” says Sen. Leahy of Vermont to the oil company executives. “The companies you represent are profiting.”

Yeah? So what? Oil companies make about 4-cents per gallon gas. The federal govt makes at least 18-cents, and state govts make much more than that. Besides, most oil companies are actually “losing” money on downstream operations. The refining margins just plain suck right now.

And whose fault is it that people “are hurting?” People in the US have made several generations of bad choices in energy policy, to include electing guys like Patrick Leahy to the US Senate. The Patrick Leahys of the world have never done a darn thing to increase the energy supply of this country. They just sit back, pass legislation to lock up areas the size of Maine — as well as 85% of the US Outer Continental Shelf — and then take potshots at the people who put gas into the fuel tanks of America.

Really, Senator… Would you trade the management team of Chevron or Exxon for the mangers of Pemex? You want gas lines? Try that, genius.

Here is the scoop, if you missed the story.

Until we meet again

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Congress Beats Up On Oil Execs…

But it’s not just the EIA that are moving up estimates, traditional under-forecasting oil analysts are doing the same too.

In Reuters’ monthly survey of oil-price analysts at the end of March, the average forecast of the 29 analysts surveyed was $90.55, up from $83.77 in February. Five of the analysts in the survey forecast average WTI prices at above $100 a barrel.

So, I reckon consensus numbers still have room to move higher, boosting the oil sector after the upcoming quarterly reporting season. (Note: Our oil play Royal Dutch Shell (LSE: RDSB) posts its quarterly numbers on 29 April).

WTI futures averaged $72.32 per barrel in 2007, with the 2008 estimate at $101. The EIA also issued a 2009 forecast of $92.50.

Continues below…

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The oil price moved ahead on the news yesterday, but eased this morning to stand at $108.22. This move means that the US gasoline market is also expected to tighten as refiners continue to run refineries at low capacity. The crack spread this morning for WTI Cushing fell $0.621 to $8.992. This is bullish for the oil price because refiners won’t operate at full capacity if they cannot make a decent profit from their operations.

The EIA also said that the projected higher costs for crude oil will contribute to higher petroleum product prices (erm, well done for that analysis guys).

Gasoline prices were projected to average $3.36 per gallon in 2008, up 55 cents from last year. Diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price. The government department is also predicting spikes to $4 a gallon in the peak summer driving season.

This report makes me even more convinced that oil is likely to stay above $100 a barrel for the majority of the year. In fact, I’m starting to believe that the Reuters’ consensus view, which has significantly lagged real oil prices, will breach the $100 level in the next few months DESPITE the credit contraction and DESPITE predictions for gasoline consumption to fall by 85,000 barrels per day in the peak driving season.

It’s not just me that has this view, the market agrees with me.

Despite the EIA saying demand will fall, the futures strip price, which is the average price of the next 12-months futures contracts, has edged only slightly lower. (Remember: I said yesterday that this is the data used by companies such as Royal Dutch Shell to do their own financial planning.)

Yesterday the strip price stood at $105.90. News of falling demand has reduced this to $105.19.

The Reuters’ consensus for 2008 stands at $90.55, which lags the futures strip price by 16.9%. I prefer the futures strip price and I am therefore convinced that the oil price will stay above $100 for most of the year. Indeed, I said last month that I thought oil was on the way to $120 a barrel. That is still my view.

One other supporting factor from the report was the fact that the decline in US gasoline demand started during the second half of 2007 and has accelerated so far this year. Over this time period, the oil price has soared.

Regards,

Garry White

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