In This Article
30-Second Summary
Headline Links: Oil prices hit all-time highs
Opinion & Analysis: Is there enough oil to go around?
Key Players: OPEC
Reference Material: Extraction technologies and ‘peak oil’
Related Links: Alternative fuel sources, the flagging U.S. economy and political strife in the Middle East
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No Relief in Sight as Oil Prices Rocket
November 12, 2007 05:26 PM
by
findingDulcinea Staff
The cost of a barrel of crude oil hit a record $98.02 on Nov. 7, spurring observers to ask why hydrocarbon commodities are trading at increasingly high prices and when this upward trajectory will end.
30-Second Summary
The cost of a barrel of oil flirted with the century mark on Nov. 7, trading at a record high of $98.02 during Asian trading hours.
The falling U.S. dollar and the credit crisis sparked by problems in the sub-prime mortgage market are causing commodities traders to move their investments into oil. This is seen as a more secure investment during times of economic uncertainty.
In turn, rising oil prices force the greenback’s value even lower, as more investors are drawn away from the faltering currency toward crude.
Adding to the pressures created by the weakened U.S. economy are fears about supply over both the short and long term.
An Oct. 26 report from the U.S. Department of Energy stated that oil inventories were down by 5.3 million barrels from the previous week. There is also speculation about the possibility of a Turkish incursion into Northern Iraq and American military action against Iran, which are prompting buyers to anticipate a bottleneck in the market.
Then there are the less transitory worries. Some analysts postulate that world oil reserves will soon hit the “Hubbert peak,” the maximum point of profitability. From then on, extracting oil will become harder and more expensive.
Exacerbating all these problems of supply is the growing demand for oil from the developing markets of India and China.
As to what the future holds, The New York Times reports a pessimistic forecast from Ric Navy, an energy analyst at bank BNP Paribas. Navy said, “Have we seen the ultimate highs? I wouldn’t think so.”
The falling U.S. dollar and the credit crisis sparked by problems in the sub-prime mortgage market are causing commodities traders to move their investments into oil. This is seen as a more secure investment during times of economic uncertainty.
In turn, rising oil prices force the greenback’s value even lower, as more investors are drawn away from the faltering currency toward crude.
Adding to the pressures created by the weakened U.S. economy are fears about supply over both the short and long term.
An Oct. 26 report from the U.S. Department of Energy stated that oil inventories were down by 5.3 million barrels from the previous week. There is also speculation about the possibility of a Turkish incursion into Northern Iraq and American military action against Iran, which are prompting buyers to anticipate a bottleneck in the market.
Then there are the less transitory worries. Some analysts postulate that world oil reserves will soon hit the “Hubbert peak,” the maximum point of profitability. From then on, extracting oil will become harder and more expensive.
Exacerbating all these problems of supply is the growing demand for oil from the developing markets of India and China.
As to what the future holds, The New York Times reports a pessimistic forecast from Ric Navy, an energy analyst at bank BNP Paribas. Navy said, “Have we seen the ultimate highs? I wouldn’t think so.”
Headline Links: Oil prices hit all-time highs
As investors moved funds out of a weakening U.S. dollar, on Nov. 7, the price of a barrel of oil rose to $98.02 during East Asian trading hours. Oil production forecasts showed U.S. reserves falling short for the third week in a row. International oil companies BP and ConocoPhillips evacuated workers and temporarily shut down operations due to a threat of severe storms around North Sea drilling facilities.
Source: MarketWatch
On Oct. 26, prices surged to $93.20 per barrel of crude oil after the Organization of Petroleum Exporting Countries (OPEC) released news that production increases will not come online as soon as originally expected. Turmoil in oil-producing regions—namely conflict along the border of Turkey and Iraq; and Lebanese troops firing on Israeli warplanes—brought on fears that access to supplies would decrease. The U.S. Department of Energy’s Energy Information Administration reported that oil inventories fell by 5.3 million barrels the previous week, exceeding sector analysts’ expectations.
Source: Financial Times (free registration required)
The record high oil price seen on Oct. 26 reflected a price increase of 3 percent since the beginning of the week. Along with the pressure of geopolitical instability, the falling dollar has caused investors to move their funds into commodities. Consumer anxiety over rising energy costs and the sub-prime mortgage crisis has further weakened the U.S. dollar, keeping oil prices sky-high. Ric Navy, an energy analyst at bank BNP Paribas, said “Have we seen the ultimate highs? I wouldn’t think so. These hedge funds and these pools of money that are out there, they’d like to go with the trend."
Source: The New York Times (free registration required)
Opinion & Analysis: Is there enough oil to go around?
According to the Department of Energy’s Energy Information Administration (EIA), world consumption of petroleum and other liquid fuels such as ethanol is set to grow from 83 million barrels of oil equivalent (BOE) per day to 97 million in 2015 and 118 million in 2030. Meeting this demand will necessitate the production of another 14 million barrels per day from 2004 to 2015 and an additional 20 million BOE per day from 2015 to 2030. The reference model used by the EIA shows world oil prices per barrel declining from $68 in 2006 to $49 in 2014, rising to $59 in 2030, when adjusted for inflation in terms of 2006 dollar value. Yet, given the uncertainties surrounding future petroleum supplies, the EIA anticipates oil prices could go as low as $36 or rise as high as $100 in terms of 2006 dollars.
Source: Energy Information Administration
The International Energy Agency (IEA), a think tank affiliated with the Organization for Economic Cooperation and Development, said that China and India are on track to double their energy consumption by 2030, causing fossil fuel supplies to dwindle more quickly and increasing greenhouse gas emissions. In 25 years, China and India’s oil imports will outpace those of the United States and Japan, according to IEA estimates.
Source: The Wall Street Journal (free registration required)
“All countries must take vigorous, immediate and collective action to curb runaway energy demand. We need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies,” says Nobuo Tanaka, head of the IEA. In 2030, it is expected that fossil fuels will still provide 84 percent of the world’s energy needs, while demand will have increased enormously if India and China’s economies continue to grow as they have. Oilfields in the North Sea and the Gulf of Mexico are expected to dry up and oil shale deposits in Canada will meet only a tiny fraction of global supply, forcing many nations to rely increasingly on Middle Eastern reserves. Chuck Squatriglia, a blogger for Wired magazine, suggests that the U.S. economy could shift from oil to hydrogen within the next 10 years for “$100 billion—about what we spent in today’s dollar to put a man on the moon.”
Source: Wired
Richard Rainwater is a multibillionaire investor who subscribes to what has been termed the “imminent peak theory,” which posits that global oil resources will run out soon. “In 1988, there were 15 million barrels a day of shut-in production, and the world was using about 55 million barrels of oil. Today the world is using over 80 million, and there’s no shut-in production left,” he says. He is known for making claims such as “an economic tsunami is about to hit the global economy as the world runs out of oil.”
Source: CNN
Key Players: OPEC
The Organization of Oil Exporting Countries (OPEC) was created in 1960 at the Baghdad Conference by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Nine other countries joined later: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon and Angola. OPEC’s current headquarters are in Vienna. The group’s main goals are “to coordinate and unify petroleum policies, in order to secure fair and stable prices for petroleum producers; a regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.”
Source: OPEC
Reference Material: Extraction technologies and ‘peak oil’
Four key sources and technologies can increase the United States’ oil supply. However, they are costly and push up the price of oil. Enhanced oil recovery involves injecting gases or liquids into reserves to improve fluid flow when the they have been exhausted by traditional means such as drilling. The technique adds about $30 to a barrel of oil’s cost. Deepwater drilling allows firms to tap into oil located from 1,000 to 10,000 feet below the ocean surface. The production costs are 3 to 4.5 times the cost of shallow-water drilling. Oil sands are deposits of bitumen, a viscous form of crude oil that must be diluted with lighter hydrocarbons. The world’s largest deposits are in Alberta, Canada, where they are being refined at $18 to $22 per barrel. In 2005, oil production from Canadian sand deposits stood at 1.6 million barrels per day. This number is expected to rise to 3.5 million barrels per day by 2030. Lastly, oil shale, sedimentary rock containing bituminous materials that yield petroleum-like liquids when heated, is a possible future source. This method has not yet reached the research and development stage, however.
Source: Government Accounting Office (GAO)
Energy Bulletin, a Web site that styles itself as “a clearinghouse for current information regarding the peak in oil supply,” explains what is meant by “peak oil.” Once reserves located near the surface have run out, drilling companies will have to turn to harder-to-reach sources, such as those under water or in tar sands, like those in the Western Canada Basin. Getting to these reserves requires expensive technology, and the extra expense would be passed on to the consumer. An American geologist named Marion King Hubbert theorized in the 1950s that oil production would follow a bell-shaped curve that has become known as the “Hubbert peak.” He forecast that U.S. production would peak in the 1970s and global extraction would reach maximum capacity sometime in the late 1990s or early 2000s. When deepwater reserves and oil shale supplies are counted, 2010 is estimated to be the year when the world will reach peak oil production.
Source: Energy Bulletin
Related Links: Alternative fuel sources, the flagging U.S. economy and political strife in the Middle East
Top automakers Daimler and Ford are embarking on a joint venture, Automotive Fuel Cell Cooperation, after their purchase of a majority stake in Ballard Power Systems, a hydrogen fuel cell developer and manufacturer. “It sends a very clear message that there’s a viable case to be made for fuel cell vehicles,” Ron Cogan, editor and publisher of Green Car Journal, told Wired magazine. Daimler predicts that its first models should be ready for roll-out sometime between 2010 and 2015. Engineers, scientists and automaker Toyota have a more conservative target date of 2030, due to the currently prohibitive costs and lack of fuelling stations.
Source: Wired
For more information on the falling dollar, see the Beyond the Headlines story “When the Loon Soars Higher than the Eagle."
For more information on the sub-prime mortgage crisis, see the Beyond the Headlines story “Lenders and Home-Buyers Long Deaf to Mortgage Warnings.”
© 2009 Dulcinea Media, Inc.
