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40 dollars a barrel is a considerably cheap price for oil. It’s very likely that oil prices will rise again in the latter half of 2009. It’s also important to consider that drilling oil out of the ground has become much more expensive since 10 years from today as more expensive drilling techniques are necessary to maintain the output of major oil fields.

The International Energy Agency (IEA)  warns that unless the necessary investments into oil fields and the energy infrastructure are made, we’re likely to see an oil supply crunch in 2010 when world oil demand recovers. Global oil consumption had been rising steadily since 1983 until the outbreak of the financial crisis sparked by the burst of the real estate and credit bubbles which has spread through all continents and froze economic activity, curbing demand for oil for the first time in decades.

The IEA’s executive director Nobuo Tanaka said recently: “when the economy starts growing, recovery comes again in 2010 and then onward, we may have another serious supply crunch if capital investment is not coming”. We can leave the if-clause out since oil exporters have already delayed or canceled numerous exploration projects since oil prices fell below $60 a barrel. It’s very likely that the OPEC cartel will fall short of its goal to increase it’s production capacity by 5 million barrels a day until 2012. Even when oil was trading at 147 dollars per barrel on July 14, the investments made were below the one trillion dollars a year (compare World Energy Outlook 2008) the IEA estimates is necessary just to maintain the current production rate. Companies exploiting Canada’s tar sands have also scaled back their investments since extracting oil from the sands is only profitable at oil prices above $90 because it’s rather complex and expensive. This shortsightedness is incredible as oil industry insiders should know that oil prices will rebound to well above $100 a barrel in the medium term due to the scarcity of supplies and the fact that supply will grow again. Even if the recession stayed for years in OECD countries, demand growth from emerging economies would drive prices up. As you can see in the WEO 2008, non-OECD countries have already surpassed OECD countries in terms of oil consumption. It looks like once demand picks up again, oil suppliers won’t have the capacities to meet it. Tanaka expects demand to rise by about 1% in 2010 when growth rates will go up again in developing countries. Furthermore, OPEC theoretically could scale back production dramatically enough to force prices above $100 which cannot be ruled out in the medium term as most OPEC countries depend on oil prices above $80 a barrel to balance their budgets. (Venezuela $95/barrel ; Saudi Arabia: $45 - $60)

However, major Western oil companies are still investing, partly because they have an abundance of cash and the return on these investments will be exceptional.

An executive of ExxonMobil said that low oil prices are not affecting the company’s spending plans. The world’s largest private oil company will conduct its investments as originally planned. They didn’t anticipate the oil price rally in the first half of 2008, neither did they consider the possibility of such a steep decline in prices in such a short period of time. While ExxonMobil has an abundance of cash due to it’s record-high profit of $45.2 billion for 2008 (the biggest annual profit in U.S. corporate history), the company has a massive advantage over smaller competitors and could possibly grab any other energy company which is not anymore as afloat. Russell Bellis, the exploration director for Europe said that “there may be some consolidation”. Whether Exxon plans to take over a direct competitor or a company in another field of the energy sector is not yet clear. However, it’s obvious that all private oil companies need to become more active outside of the oil business since their share of the oil market has declined decisively over that last decades (to 16% of global reserves) while inefficient state-owned oil companies are having access to the majority of proven reserves (65%). With this and mind and the tremendous growth prospect for the alternative energy market, the current situation is a unique opportunity for ExxonMobil, Chevron, Conoco Philips, BP, Shell and Total to gain a big share of the green tech market. There are numerous scenarios that would make sense: They could acquire a manufacturer of electric cars, a lithium-ion battery producer, a wind turbine manufacturer or a lithium-mining company. This step would help them to become more future-oriented, improve the public opinion about “Big Oil” and reduce dependence on the declining and ever more difficult oil market. Nationalist governments have  shut out most of the multinational oil groups. This is a major problem even for Exxon whose daily oil production capacity has gradually decreased over the past few years. Instead, Exxon needs to fill the gap with natural gas, although gas is less lucrative and Exxon depends primarily on Quatar for its gas supplies.

 While the U.S. government is likely to raise taxes on the oil companies’profits, they could benefit instead of the huge public investments into renewable energies as a part of the economic stimulus package. Not even ExxonMobil can grow in the future without expanding to the ET sector. Involvement in green tech will likely give a good return for Exxon and other big oil corporations. Especially with the gradual shift of power to national companies, renewable energy might look more appealing to Western oil corporations. While Chevron, Shell, Total and BP are investing into alternatives, Exxon has only been watching for a long time. However, this might change in the years ahead.

IEA director Tanaka warned OPEC – whose members are calling for another production cut on their next meeting in Vienna on March 15 – that low oil prices can contribute to economic recovery while higher prices could prolong the recession. It’s to be seen whether OPEC’s members can agree on another supply cut, on top of the 4.2 million barrels per day reduction on which they’ve already agreed.

Now I’d like to know your opinion. Have oil prices reached the bottom?

This entry was posted on Tuesday, February 17th, 2009 at 7:41 PM and is filed under Energy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.