Oil, supply/demand/pricing, effects on economy

Discussion in 'Commodity Futures' started by Josh_B, Apr 3, 2003.

  1. Josh_B


    Presentation to a House of Commons All-Party Committee
    on July 7th 1999

    C.J. Campbell

    The title of my talk is The Imminent Peak of World Oil Production. I would like to provide the evidence. It is of course a very large subject. There are colossal economic and political consequences. Indeed the very future of our subspecies – Hydrocarbon Man – is at stake. But I think that you are better qualified than I to assess these matters. I will therefore concentrate on the technical assessment....

    ....I should say something about the International Energy Agency. It was established in the aftermath of the oil shocks of the 1970s, under a treaty signed by most OECD governments. It has a mandate to study oil supply and alert the OECD governments to dangers to supply. Note that the governments are treaty-bound to react and coordinate their response.

    It is naturally a highly political institution. But nevertheless it did succeed this year to deliver a coded message. I am glad to say that the media is decrypting the message, as I gather the IEA intended.

    I would say that this message from the IEA, the highest world authority on the subject, is dynamite. I am sorry to say that the European Commission remains in blissful ignorance; and I don’t have any confidence in the DTI either.

    I will now explain what I think is a reasonable scenario

    1) Oil demand will grow at 1.5% a year – slightly below the IEA estimate of 1.8% – until Swing Share reaches about 35% in 2001.

    2) The Middle East countries will then have the confidence to impose much higher prices, realising that they have no competition. They may even get such confidence sooner.

    Norway Official

    For example, they might read an official report showing that Norway’s production is set to halve by 2006. Norway is the world’s second largest exporter. The impact on Swing Share is obvious.

    Look again at Scenarios

    3) I think prices may briefly soar to very high levels due to the working of the market that sets prices on the marginal barrel. I believe that the market itself may be manipulated by hedge funds and similar insiders, who are in a position to talk price up and down. They must have made huge fortunes when prices recently rose 80% over a few weeks. Most forecasts now predict falling stocks by the last quarter as the insiders talk price up again.

    4) I think that a price shock around 2001, if not before, from Middle East control is inevitable and will probably trigger a stockmarket crash

    5) I think that demand does become elastic above about $30/b, reacting to normal market forces, so higher prices may curb demand.

    6). Nevertheless, I think it will be a time of great political and economic tension as Europe, America and Japan vie for access to Middle East oil. More missiles can be expected. The third world will be badly hit, being unable to afford imports. Agriculture is very dependent on oil.

    7). But I expect that somehow a plateau of production, however volatile, will unfold around $30 a barrel. But the end of the plateau will soon come into sight.

    8) It may have a fundamental impact on investment. Up til now, the investment community has believed in perpetual growth on which cycles are superimposed. The bottom of each cycle has been higher than its predecessor making capital appreciation the primary goal of investment. But the tensions of the oil shock and related events, including the colossal financial transfers to the Middle East, may create a new view.

    After the many years of growth we may then experience a new downward trend, however cyclic. Share prices may sink to more realistic levels as the main focus will be on yield not growth. Capital will be destroyed.

    9) The plateau has to come to an end by around 2008 when Swing Share will have passed 50% and the Swing countries in the Middle East will be approaching their depletion midpoint too. Production will then start its inevitable long term decline at about 3% a year. Increasing shortages will develop, and agriculture and transport will be seriously affected. The global market will come to an end because of high transport costs.

    That is a scenario. There are of course many alternatives, but the range of possibility is limited given the resource constraints. These constraints are facts not scenarios. If by some miracle we could add 500 Gb of reserves – more than half as much as produced so far – it would delay peak by only ten years.

    One indisputable fact stands out. Discovery peaked 30 years ago. It takes no feat of intellect to conclude that we now face the corresponding peak of production.

    Full presentation contains graphics on oil generation, Notrh sea generating maps, drilling info from shell, Amoco, etc.

    Interesting that his models predicted prices in the 30-40 area for our times.


  2. Please just post a link next time. Thank you.
  3. 4) I think that a price shock around 2001, if not before, from Middle East control is inevitable and will probably trigger a stockmarket crash

    5) I think that demand does become elastic above about $30/b, reacting to normal market forces, so higher prices may curb demand.


    He is definitely wrong on point 4 and probably wrong on point 5. I wouldn't give much weight to this, sounds like scare mongering.
  4. I think he is correct on point 5. Demand becomes quite elastic, but prices have to remain there for an extended period of time. This is one reason why OPEC doesn't like prices over $30 (the other is that this encourages exploration, and alternative energy use).

    Its funny though how he didn't mention reserves in Russia, and places like Khazakstan. No one is even sure how much these places have. Russia's proven reserves are near Iraq's, and its possible they could be larger than Saudi's. This oil has just begun to be tapped on a large scale. BTW, Russia is running a budget surplus now, largly due to oil. Putin has a lot to do with it as well.

  5. Josh_B


    Jayford, This following article is more comprehensive.

    Major Oil Field Discoveries

    Country Year Region
    South America 1868 Brea, Peru
    Czarist Russia 1870 Surakhanoskoye, Azerbaijan
    North America 1871 Bradford, Pennsylvania
    Middle East 1908 Masijid-I-Suleman, Iran
    Southeast Asia 1929 Seria, Brunei
    China 1938 Lochunmiao, Gansu
    North Africa 1956 Hassi Messaoud, Alergia
    North Sea 1969 Ekofisk, Norway

    full detailed table by region supply/demand


    The Future Price of Oil

    Technology hasn’t been able to detract from the predictive abilities of Hubbert’s models for oil production decline. The world is still running out of cheap oil. This will eventually lead to a new era in the pricing of oil and gas and all forms of energy. The price of oil will no longer reflect the simple laws of supply and demand that exist in a free market. To a greater degree, the price of oil will be based on monopolistic principles determined by a handful of producers located in the Middle East. As the margin of non-OPEC oil and gas production and reserves decline, the price of energy will steadily rise and be freed from the constraints of economist’s supply and demand models. Until we find a bountiful alternative to hydrocarbons, the world will be forced to pay whatever the monopolists demand.

    Scarcity Will Be The Source of Conflict

    Of all of the resources known to man, none is more likely to provoke a major war between states in this new century than oil. The only other resource capable of moving states towards war is water. Modern industrialized states can’t survive without energy. In this case, that means oil. In the words of Homer-Dixon, ”…in the coming decades the world will probably see a steady increase in the incidence of violent conflict that is caused, at least in part, by environmental scarcity. Developing countries are likely to be affected sooner and more severely than developed countries. They tend to be much more dependent on environmental goods and services for their economic well-being; they often do not have the financial, material, and human capital resources to buffer themselves from the effects of environmental scarcities; and their economic and political institutions tend to be fragile and riven with discord.” 10 Homer-Dixon went on to describe five kinds of conflicts affecting these countries: disputes over environmental degradation, ethnic clashes arising from population migration, civil strife from scarcity that affects economic productivity, scarcity induced war over resources (i.e. water), and North/South conflicts between developed and the developing world. 11

    Oil is Geopolitical

    This brings up another dimension to oil that isn’t factored into today’s modern economic laws of supply and demand. In the 21st century, oil is geopolitical. Oil isn’t a mere widget whose price can be determined by simple supply and demand equations. Oil is a depleting asset which will take on greater political dimension in the decades ahead. Oil was recently a source of conflict in the Middle East in the last war, and it may be again. The Middle East and the Caspian Sea contain the last major reservoirs of oil in the world. Nations will go to war to defend and gain access to that oil. Does anybody really question why the U.S. spends about $50 billion a year in order to maintain troops and warships in the Persian Gulf?

    The Middle East is a geopolitical cauldron with the Caspian States on its eastern flank and the Mediterranean on its western flank. The Middle East is a geographical land bridge between Europe, Africa and Asia. All of the current wars' important battlefields are located within this region; from Iraq and Iran to the West Bank, and Somalia and Sudan. They will become more important as the U.S. War Against Terrorism enters its second deadly phase. The War Against Terrorism will spread to other regions of the Middle East this year. The President has already mentioned some of the possibilities.


  6. The supply of oil is not scarce at all. This is why we have OPEC. An organization that tries to limit the supply of oil to keep the price at a level that will provide the member states with decent margins. However, in the coming years the population growth in those countries, fueled by oil wealth and nothing else, will force those states to produce more and more oil to sustain the exploding population. The violation of the quotas is already a major problem, and will exacerbate further in the future. Looking at the price of oil, it has remained very low adjusted to inflation since the crisis in the 1970-80's - a good indication that oil supply expands as the world demands expands.