The end of oil's stunning ride

NEW YORK (CNNMoney.com) -- The energy crisis is over.

So says CNN on the basis of these graphs:

And maybe they're right - after all, the oil price is basically at the same level today as when I started by "Countdown to $100 oil" series in June last year.

My previous diary was already on this topic (Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back) and other observers have noted this as well:

Barry McKenna (Globe and Mail)(via EnergyBulletin)

The flavour of the month is to dump on the peak oil thesis -- that world oil production has maxed out and is condemned to fall.

As the price of crude climbed ever higher last year, peak oil was all the rage. The conventional thinking then was that we were condemned to paying high prices because the world isn't finding adequate new supplies of oil and gas to meet burgeoning demand -- in Asia, North America and elsewhere.

In the past few weeks, as the price of oil has plunged more than 20 per cent from July's record high of more than $78 (U.S.) a barrel, economists have begun to second-guess and even joke about what last year was considered sound analysis.

So the left moans about pre-election price manipulation; the right crows about market mechanisms working and the energy "crisis" being nothing but, and everybody else goes back to not caring about energy as it's no longer painful or scary.

It's become a non issue again. Right?

How does that trend look like to you?

In the past 3 years, the price has dropped from $55 to $42 (-24%) in late 2004, from $70 to $56 (-20%) in late 2005, and now from $78 to $60 (-23%). Of course, the absolute size of the drop ($18) is the biggest yet, but that's what you get when you start from higher - so that would seem to be a bit flimsy in terms of data to pronounce the great bull oil market dead...

So let's turn to CNN again:

The biggest reason [prices are not going to spike again soon] is that stockpiles are near record levels and fall is what experts call the "shoulder months" - the time between strong summer demand from driving and air conditioning and winter's heating needs. Basically, there's not much to move the market.

Come 2007, investments that have been made in production, thanks to the recent high prices, could start to come online and boost supply.

In the following years Canada's massive tar sands project and other new discoveries like Chevron's Jack field deep in the Gulf of Mexico should begin to yield oil, although prices need to remain above $50 for these ventures to be profitable.

Couple this with a possible economic slowdown, especially in the U.S., and it's hard to see another run towards $80 like we saw over the summer.

"It's pretty evident that supply is responding," said Pritchard Capital's Dingmann, adding prices will "stay pretty much range-bound."

Regarding stocks, the following graph from the ever indispensable Oil Drum (back in June) should put that argument to rest: stocks are increasing because our consumption is increasing, and both are moving pretty much as the same "speed".

Regarding new fields about to come on stream, I've already discussed the recent Gulf of Mexico discovery in my previous Countdown diary (link) and Canadian oil sands in older diaries (for instance Will Canadian oil sands save the USA?) and it should be noted that: (i) they'll take a while to come on stream and (ii) the volumes produced will be nowhere near what's needed. As I noted recently, Canada's production increase in the past 5 years (+600,000 b/d) was almost entirely eaten up by Canada's own consumption increase over the period (+400,000 b/d).

The argument that many new fields are coming on stream on the back of higher prices needs to be taken with a grain of salt. As discussed here on the Oil Drum, projects take many years to come onstream from discovery or even investment decision, and most big projects to come live before 2010 are already fully known today. Industry observers that have compiled extensive databases of these projects (like Chris Skrebowski's megaprojects database (pdf)) do not expect there to be significant volumes to go much beyond the decline in production in excisting fields.

And the news from the field, as it were, are rather negative all around. Beyond Shell's Sakhalin-2 project which has made a lot of headlines recently (because Russia is threatening to cancel a vital permit) and whose costs have doubled, there have been announcements of cost overruns at Sakhalin-1 as well (run by ExxonMobil, and nevertheless expected to cost $18bn instead of $12bn now), extensive delays at Shell's Thunderhorse platform in the Gulf of Mexico, and new delays at the largest field to have been discovered in the past 30 years, Kashagan in Kazakhstan. The delay from just these two project will take out 1mb/d that were expected initially in 2008-9 for at least 2 years. (See more details over here).

Quite simply, prices dropped this month because a number of people had bet on these prices going much higher this summer on the basis of various plausible scenarios (hurricanes in the Gulf of Mexico, tension with Iran, a longer war in Lebanon). None of these things happened, and those that had speculated had to unwind their positions and take their losses, which accelerated the fall.

That drop was a short-term, market-driven event that changes nothing to the long term perspective. Even a recession in the US will not be enough to curb worldwide demand growth: demand may stagnate in North America, and grow less quickly in emerging countries, but 5% growth in China, Russia or Saudia Arabia (instead of 10% growth) still means a lot of new oil demand each year.

So don't expect me to give up on my series yet.

In fact, the fierceness of the attacks on the peak oil theme, which was beginning to get traction in the media earlier this year, shows how unwilling our societies are to undertake any change in that respect. Which simply means that prices WILL have to go up much higher to force the inevitable changes on us. It'll just be more painful for us, is all. So we should not rejoice that energy gets off the radar screen for a while again.


Earlier "Countdown" Diaries:
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)

Originally posted to Jerome a Paris on Sun Oct 01, 2006 at 07:18 AM PDT.

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