Posted on 10/29/2008 8:35:01 AM PDT by thackney
The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.
Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.
"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference in London. "We need an adequate and reasonable oil price that will continue to stimulate investment." With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."
The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007. In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.
But the move didn't stop the slide. U.S. benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange. That is down about 57% from its record high of $145.29 in July.
Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road. "We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said. "The supply crunch may come again, but in a more acute way."
The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India. That scenario could now play out all over again. "I hope we don't go through the same cycle," said Mr. Al Hamli.
In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.
To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $23 billion program.
Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA. "Maybe in unconventionals, but not conventional oil projects."
Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years. Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said. Already, some independent companies producing natural gas in the U.S. have announced cuts in investment.
"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.
Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.
Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high. Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis. Lower oil prices are "not good news for climate change," he said.
Higher prices keep things stable. The ups and downs are what kill the economy and the business. We can afford oil to trade between $65-$80. That means gas at $2-$2.50 a gallon. Adjusted for inflation that’s very reasonable.
Low prices are what will hammer the free-spending Arab Leaders as they will not be able to have the handouts to their people as they ahve been doing. They are frightened.
The one who should be most frightened is Chavez who has savagely attacked the Venezuelan oil industry and provided ultra-cheap crude to citizens and neighbors.
Look for him to take sanctuary in Cuba when the mobs demand his head.
Do you have a sense regarding a price level on nat gas that could cause similar behavior, such as well shut-ins and lower drilling activity here in the states?
Thanks.
Propaganda.
They are intentionally reducing output of refined product so that they scalp more profits.
The government is intentionally destroying the value of the dollar. Besides all the spending on buying worthless investment paper they are now deliberately destroying the dollar through currency intervention to help exports. Last night the dollar index had it biggest drop since 1985.
Of course oil is going to go up.
You are right. OPEC shot themselves in the foot with their greed. Then they figured out that they liked money more than they wanted to bring America down.
“Low oil prices are very dangerous for the world economy,” said Mohamed Bin Dhaen Al Hamli”
China and India need oil...sell it to them. We will drill for our own.
“Low oil prices are very dangerous for the world economy,” said Mohamed Bin Dhaen Al Hamli”
China and India need oil...sell it to them. We will drill for our own.
“Low oil prices are very dangerous for the world economy,” said Mohamed Bin Dhaen Al Hamli”
China and India need oil...sell it to them. We will drill for our own.
I agree Thackney. Here in the Permian Basin rigs are already starting to get stacked and layoffs happening.
$60 is when my yellow flag is raised and $45 is the red flag.
The late 90’s were when the industry got decimated and I do not want that to happen again.
When are the folks here on FR going to realize that OPEC nor the evil oil companies do not set the price of oil. Wall Street does.
No sh*t Captain Obvious, ya think?
Like the 150% inflation in oil prices in 14 months was a good thing! It contributed in a major way to our current economic problems and sent billions of dollars to the Mideast.
Supply and demand sets the price of oil and all other commodities. When Wall Street speculators run up the price beyond what supply and demand dictates, the market reacts and oil prices tumble again. This lesson has been around for at least 400 hundred year with Holland and its tulips.
OK by me, my living has been in the oil industry for 40 years now, so I use some more NYMEX 140 oil. Actually, oil prices have been out of whack since NYMEX was allowed into the oil market. Prior to that your “supply and demand” claim was actually the case.
OK by me, my living has been in the oil industry for 40 years now, so I use some more NYMEX 140 oil. Actually, oil prices have been out of whack since NYMEX was allowed into the oil market. Prior to that your “supply and demand” claim was actually true.
Shhhhh!
Things are much more dramatic on Free Republic when fewer people grasp the basic principles of economics. If we all viewed prices as supply and demand at work, think of how boring it would be around here!
After peaking at $69.47, now down to $67.43. Still $5.00 up from yesterday’s close.
SaxxonWoods,
I’ve been out of the Natural Gas business too long to know what price makes a difference. A lot of work recently in the Shale and I don’t know where their cost are at.
BOBTHENAILER,
Can you share any number that would answer this? Or are we about there now?
Yep, Adam Smith’s ‘invisible hand’ just flipping the bird to the oil sheiks!
Thanks thackney. I’ve got three new gas wells drilled by Chesapeake under one of my properties. I’m hearing rumors they may shut them in due to low nat gas price. They can do that for up to two years while paying me $1 per acre. Maybe that’s just as well for me, as the royalty payments might well be higher later.
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