Do you think crude prices will fall?
Tuesday, 26. February 2008, 07:29:53
Many ‘expert’ analysts think so; and we’re calling their bluff right out here!We are back again to the good old days of crude oil at $75 a barrel (September 2007 light sweet crude oil futures were at $75.79 on July 20, 2007, on NYMEX). But many so called ‘expert’ analysts are calling this a temporary movement. Guess what, we decided to call the ridiculous bluff ...
The reason for our Sherlockian approach can be found in the simplest concept of Peak Oil – which says that the world has reached the peak of oil production (if not, it will soon happen in the near future) & the era of cheap oil is over. Well, if one sweeps a view across Ghawar in Saudi Arabia to Cantarell in Mexico, or even to Daqing in China – some of the largest oil fields in the world – a seeming symmetric depletion of oil goes on to prove the same. Let alone the demand-supply mismatch, this has quite some implication on the prices – not because of speculation, but due to a rise in the cost of production of oil. It’s in the nature of humans to go for things which are easily accessible. So, once we run out of these available supplies, we will have to move to less feasible & economical wells. More money will have to be spent to pump out the same barrel of oil & transport it to the market place, thereby, jacking up the prices further. This phenomenon is already taking place & can be substantiated by declining Energy Return on Energy Invested (ERoEI), that measures the energy is generated by the amount of energy invested. It is to be noted that few oil wells at present are at an ERoEI of 5 as compared to an ERoEI of 200 in the past. Logically, & in true economic sense, this declining ERoEI can only be sustained if energy prices rise & rise higher than other items. Furthermore, ever increasing demand (see figure) will obviously push oil prices further upwards.
Michael Lewis, Global Head, Commodities Research, Deutsche Bank, confirms to B&E, “We believe the move from US$75/bb to US$60/bbl between August & September 2006 will not be repeated over the next few months.” Next few months? We suspect this range cannot be sustained more than for a short duration in the next few years too. Till alternative sources of energy explicitly become preferred usage sources, oil price is a bluff we’ll love to call again!
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