Peak Oil News: Ready for $262 barrel oil?

Friday, February 24, 2006

Ready for $262 barrel oil?

Two of the world's most successful investors say oil will be in short supply in the coming months.

By Nelson Schwartz

Be afraid. Be very afraid.

That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.

"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.

Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.

Hermitage's Bill Browder doesn't yet have the stature of George Soros. But his $4 billion Moscow-based Hermitage fund rose 81.5 percent last year and is up a whopping 1780 percent since its inception a decade ago. A veteran of Salomon Bros. and Boston Consulting Group, the 41-year old Browder has been especially successful because of his contrarian take; for example, he continued to invest in Russia when others fled following the Kremlin's assault on Yukos.

Doomsdays 1 through 6

To come up with some likely scenarios in the event of an international crisis, his team performed what's known as a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off in six different situations. The fall of the House of Saud seems the most far-fetched of the six possibilities, and it's the one that generates that $262 a barrel.

More realistic -- and therefore more chilling -- would be the scenario where Iran declares an oil embargo a la OPEC in 1973, which Browder thinks could cause oil to double to $131 a barrel. Other outcomes include an embargo by Venezuelan strongman Hugo Chavez ($111 a barrel), civil war in Nigeria ($98 a barrel), unrest and violence in Algeria ($79 a barrel) and major attacks on infrastructure by the insurgency in Iraq ($88 a barrel).

Regressions analysis may be mathematical but it's an art, not a science. And some of these scenarios are quite dubious, like Venezuela shutting the spigot. (For more on Chavez and Venezuela, click here.)

Energy chiefs at the World Economic Forum in Davos downplayed the likelihood of a serious oil shortage. In a statement Friday, Shell's CEO Jeroen Van der Veer declared, "There is no reason for pessimism." OPEC Acting Secretary General Mohammed Barkindo said "OPEC will step in at any time there is a shortage in the market." But then no one in the industry, including Van der Veer, foresaw an extended run of $65 oil -- or even $55 oil -- like we've been having.

It's clear that there is very, very little wiggle room, and that most consumers, including those in the United States, have acceded so far to the new reality of $60 or even $70 oil. And as Soros points out, the White House has its hands full in Iraq and elsewhere.

Although there are long-term answers like ethanol, what's needed is a crash conservation effort in the United States. This doesn't have to be command-and-control style. Moral suasion counts for a lot, and if the president suggested staying home with family every other Sunday or otherwise cutting back on unnecessary drives, he could please the family values crowd while also changing the psychology of the oil market by showing that the U.S. government is serious about easing any potential bottlenecks.

Similarly, he could finally get the government to tighten fuel-efficiency standards and encourage both Detroit and drivers to end decades of steadily increasing gas consumption. These kinds of steps would create a little headroom until new supplies do become available or threats like Iran's current leadership or the Iraqi insurgency fade.

It's been done it before. For all the cracks about Jimmy Carter in a cardigan and his malaise speech, America did reduce its use of oil following the price shocks of the 1970s, and laid the groundwork for low energy prices in the 1980s and 1990s. But it would require spending political capital, and offending traditional White House allies, and that's something this president doesn't seem to want to do.


At 9:41 AM, February 24, 2006, Anonymous Chris T. said...

Wow, what an interesting post. I have now bookmarked your blog. Keep up the good work!

On a lighter/side note Andrew of Arabia is good for a laugh every now and then.

At 12:46 PM, February 24, 2006, Blogger Diane said...

"Although there are long-term answers like ethanol.."
Please read the lecture, "Energy & Environmental Aspects of Biofuels" at the following link:
Ethanol is really NOT an option.

At 1:46 PM, February 24, 2006, Anonymous Anonymous said...

These two miss the biggest oil shock of all. If the US and Israel bomb Iran, particularly with a nuke or two, the response from Iran could stop most oil from the Gulf. This would increase the oil price to well over $262 per barrel. The only question is when this will occur, not if.

At 1:01 AM, February 25, 2006, Anonymous SqueakyRat said...

Moral suasion counts for nothing. You're talking about the basics of people's lifestyles here. If you want a crash program of conservation in the US, you're talking about a big energy tax or you're simply not talking at all.

At 6:07 AM, February 25, 2006, Anonymous Anonymous said...

i was reading the ap yahoo story on the attack that failed yesterday in saudi arabia.

at the bottom it said this..
"Saudi Arabia holds over 260 billion barrels of proven oil reserves, a quarter of the world's total. It currently produce about 9.5 million barrels per day, or 11 percent of global consumption. Abqaiq processes at least 5 million barrels a day."

If I am awake enough to do math this is what I come up with.
9.5 Millions barrells a day = 11% consumption. I am guessing this is per day?
This would mean approx 90 million barrels a day are used and if that is the
case then there is only about 3 days of supply (approx 260 in reserve/90 needed a day)
on reserve in Saudia Arabia. If there reserve is 25% of the worlds reserve it would appear
that there is only about 12 days of ready supply / buffer to get things flowing again.

Am I really thinking through this right?

At 9:26 PM, February 26, 2006, Anonymous Anonymous said...

Well, no you confused 260 billion barrels of reserve(that's oil in the ground) with what you thought was 260 million barrels in above ground reserves. Typically oil importing countries have thirty to ninety days emergency reserve in their own country but that's debatable especially in the U.S where the reserves were mostly used up last year after Katrina in order to keep gasoline prices down.


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