Matt Simmons gave another of his famous talks about the specter of Peak Oil. The only things that are changing, according to Mr. Simmons, are that things are getting worse for future energy supplies. It’s difficult to say with specificity how bad things are, because the data are so poor on a worldwide basis.
“Look at what happened with the bad information we had, or didn’t have, with the financial institutions over the past couple of years,” said Mr. Simmons. “With our energy data, it’s worse. We’re in for some shocks that will change our lives in ways that’ll rival Pearl Harbor.”
Expect to see oil at $200 per barrel by the end of 2010, according to Mr. Simmons. Also expect to see net oil exports from Mexico simply vanish within 24 months or less. This will play havoc with U.S. refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster. These die are cast.
Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. For example, there’s a stealth “Twitter revolution” in Iran that’s slowly shutting down that country’s oil production. Shutting down the oil industry was the straw that broke the camel’s back and brought down the Shah in 1979. There’s some thinking that it may work to rid Iran of its mullahs.
In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment.
In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war.
In Iraq, according to Mr. Simmons, “They’re in the dark about how to rebuild their oil industry.”
And of course, a lucky terrorist shot could take down any of hundreds of major oil installations worldwide, wreaking havoc through the following ripple effect.
Mr. Simmons admires Brazil’s Petrobras, calling it “the finest large oil company in the world today.” But the offshore success of Petrobras will simply not be able to make up for the multitude of other problems with the global energy industry. There won’t be enough oil, and it won’t arrive in time. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. “People need to understand how expensive it is to obtain oil,” said Mr. Simmons.
Much of the world’s energy infrastructure is old and rusting and will require several trillions of dollars to replace — if it can be replaced. (Is there enough steel, for example? Where will the money come from?) Add the aging work force, within which many new hires were laid off in the past year. There’s a serious lack of skilled talent across the board, and no amount of clever management and automated “expert systems” will make up the difference.
Finally, new technology is coming on line slower than most people anticipated. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas. Thus are high costs, delays and reduced cash flows hurting the ability of the energy industry to maintain adequate levels of capitalization.
The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves set for the ride.
Until we meet again,
Byron King
http://www.howestreet.com/articles/index.php?article_id=11209
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