Peak Oil Passnotes: Oil at $35? It's Being Said
By Edward Tapamor
The oil market has been shaken recently. The break down to $49.90 intraday two weeks ago was a new step after eighteen months of a $55 floor price. And on the way, what has become of the notion of ‘peak oil’? One guy I know who has been relatively at ease with the idea, who supports the idea, found himself questioning it recently. It was a surprise.
The general perception was that we would get oil prices inching ever upwards, an erroneous perception of course. But people really bought in to that idea. Predictions were made that $50 oil or $60 oil would make markets collapse. And not just by odd men on the internet with a healthy imagination. Even here on Resource Investor this columnist thought $80 crude was a shoe-in in 2006. Sure, we got to $78.40, but still.
But there are too many technical sides to markets, in the simplest sense, long and shorts. They prohibit the straight lines on the graphs. When something goes long, eventually enough people have a vested interest in shorting it. We have things like software driven spikes or dips, and year-ends. As in 2005 and 2006 the price has been artificially distorted by the year-end, too low in 2005, too high in 2006.
What we do seem to be seeing clear signs of is more worrying. Inflation has started to get above even political targets in the European and U.S. economies. It is not out of control but it’s not under control either. The wage settlements in Europe are also moving higher, they have to be for ordinary people to be able to afford lives, let alone housing.
Demand for energy is somewhere around flat, the U.S. and China are inching up but nothing the world cannot handle. We are now seeing the effects of the first wave of crude oil price inflation. When it broke out of the $22-$28 OPEC comfort zone for good in 2003 and 2004.
New production will come on stream this year from a great many sources. There has never been a better time to find oil, not at $40 let alone $78. So companies have been on an exploration and production bonanza that has seen many of them, even mid-caps such as Premier Oil [LSE:PMO], Cairn Energy [LSE:CNE], Soco International [LSE:SIA] and others really benefit.
But there it appears things have topped out. Share valuations are well down for many companies in the last twelve months, apart from good old ExxonMobil [NYSE:XOM]. We are seeing lots of new capacity in production and refining coming onstream just when there are gaps appearing economically.
So one analyst this week, who shall remain unnamed here, was talking about $35 crude on technical grounds. Well, that may turn out just to be the other side of the peak oil coin, expecting the price to keep falling.
But of course a drop in price to $49.90 or even $35 really does not signify anything as regards ‘peak oil’. Unhappily for those who thought peak oil would bring about overnight collapse of the U.S. and world economy, whenever peak oil arrives - tomorrow or in a hundred years - it will be a far slower and more drawn out process.
One of the central planks of some ‘peak oilers’ intent on collapse Armageddon-style, was the idea that an oil-induced recession would be coupled with ever rising oil prices. We are not yet at that state. Even major ‘peak oil’ proponents like Chris Skrebowski in London, the editor of Petroleum Review, think that any peak will be delayed by some kind of combination of recession and over capacity.
What the downturn in oil really seems to be signal, is not some kind of magic new world where resources are easy to extract and all the crude reserves in the world magically float to the surface. Instead what the downturn portends, is a period of time ending in recession, eighteen months or two years ahead.