By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)
With oil prices hovering near $100 per barrel, being fueled by a surging demand and tight supplies, the world is on the threshold of a new energy shock. However, this energy shock is like none before.
Energy shocks in the past have been episode shocks, such as the oil embargo of 1974, the Iran/Iraq war in 1979, the Iraq invasion of Kuwait in 1990, and the U.S. invasion of Iraq in 2004
The energy shock of today will be known as a “demand driven” energy shock, one that has slowly (or you might say rapidly, depending on your concept of time) has taken place in the past three to four years being fueled by the unprecedented industrial growth of China and India.
How often have you been shopping and picked up an item of interest; flipped it over and noticed “Made in China” and asked yourself, “Do we make anything in America anymore?”
The “demand driven” energy shock will prove to be substantially different than past “episode” energy shocks in that the effects will be more permanent with a broad and lasting impact.
The International Energy Agency (IEA) released a report in July titled “Medium-Term Oil Market Report” on the near term supply-and-demand outlook for 2007-12. The bottom line of the report is that world demand will push consumption from the 86 million barrels per day in 2007 to 96 million in 2012.
The report states, “a stable and attractive investment climate will be necessary to attract adequate capital for evolution and expansion of the energy infrastructure.” The report ended by … and I quote, “Oil looks extremely tight in five years’ time.”
By my calculation, the IEA report says it will take an additional 10 million barrels per day to meet projected growth by 2012. Actually, it will require an additional 15 million barrels per day just to replace the natural annual 4 percent decline or depletion in production.
Simply stated, 15 million new barrels per day by 2012 will get you even with today’s current production. To meet the projected 2.2 percent growth in demand and the 4 percent depletion will require a new 25 million barrels per day by 2012.
The deceptive declaration in the IEA report is the “stable and attractive investment climate,” which does not exist. With the enormous shift of oil wealth to OPEC and state-owned oil companies such as Russia, Venezuela, and China, geopolitical factors rule the day and govern the marketplace.
A report by the National Petroleum Council (NPC) said, “These shifts pose profound implications for U.S. interest, strategies, and policy-making. Many of the expected changes could heighten risks to U.S. energy security in a world where U.S. influence is likely to decline as economic power shifts to other nations. In years to come, security threats to the world’s main sources of oil and natural gas may worsen.”
Will investors be willing to invest the trillions of dollars needed to boost the level of production to meet global demand? Investors will more than likely meet the call, but not as we would think.
Stephen Thornber, a global equity fund manager, said “The majors are like dinosaurs. Their production is flat or falling, and their returns are under pressure.” Thornber has shifted to state oil companies where production is on the rise, choosing to invest in companies in Russia, China and Venezuela, and not in the majors such as Exxon, Chevron or BP.