By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)
Where do we go from here?  Oil prices settled year-end at $44.60 a barrel, down nearly 50% from the beginning of 2008, and down 70% from the July 2008 record high of $147 a barrel. At one point in December, prices plummeted to $33.87 a barrel, the lowest since May of 2004. Some analysts forecast 2009 oil prices to average $40 plus a barrel where others forecast prices in the high $60 – $70s a barrel.  “Sometimes the market is overshooting upwards and downwards, and this time this is definitely happening downwards,” said IEA’s executive director.

Addision Armstrong, director of market research for Tradition Energy says the oil price slide is about done, “I expect crude prices to hold after the February contract expires on January 20th.” “The key factor for oil prices in ’09 will be the depth and length of the global recession,” says Armstrong.

In reality, predicting oil prices in 2009 is a guess on the global economy and geopolitical changes.  Adam Sieminski, chief energy economist of Deutsche Bank, recently said that the demand for oil in 2009 would drop more than any other time in the last quarter of a century due to the weak economy.

Just how deep will the recession cut into the oil exporting countries’ economies? Exporting countries such as Mexico, Russia, Iran, and Venezuela are heavily dependent on oil revenues to fund their economies and have based their budgets on crude prices above $70 a barrel.  Even with the higher oil prices, Mexico’s economy was in a tailspin because their largest oil field, Cantarell’s production output fell 33%, more than double their estimates.  Lower oil prices will have serious ramifications to our southern neighbor.

Will the cuts in production proposed by OPEC bring balance to the supply and demand equation?  Currently world crude production is greater than demand and is causing the world to be awash with oil.  OPEC’s production cuts have yet to affect prices, mainly because the global recession is reducing demand faster than supply cuts can be made.

Low oil prices coupled with the lack of investment capital and credit, will cause oil and gas projects around the world to be scrapped or tabled in 2009.  The independent oil and gas companies who depend on capital and credit to finance their projects,  are slashing their 2009 budgets. Meanwhile, the majors or integrated companies who are sitting on plenty of cash, will continue with their 2009 projects.

And now for the good news; the lack of investment into exploration will cause a crude supply shortage and that could be as early as mid 2010. Prices will soar.  We often take for granted that oil is an unlimited resource like the air we breathe, but it’s not.  The world oil supply is fixed, embedded in our planet and is no longer being formed.

IEA (International Energy Agency) stated in its annual report that without extra investment to raise production, the natural annual global crude oil depletion rate is 9.1%.   The report warned the world needed to make, “a significant increase in future investments just to maintain the current level of production”.  IEA chief Nobuo Tanaka said,   “The price of oil has fallen too far in response to a decline in world demand for fuel.”

It is difficult for anyone to predict the severity of the global recession.  As for the price of crude oil, we can predict that without investment into exploration, a crude supply shock will occur and prices will soar.