A New View of Oil

Several entries in this blog have focused on oil prices. It’s an overarching driver of future factors that range from consumer behavior to geopolitical influences.

Lately I’ve studied oil prices more carefully and drilled into (forgive the inadvertent pun) the data that looks ahead. I’ve been a forecaster of a long-term rise in prices due to supply and demand pressures for a commodity with declining output.

I’m now adjusting my views in line with advice I give clients. A forecast is foresight that takes into account uncertainty and adjusts with time and new information. Time has passed since I began forecasting a rise and new information is available.

Frankly, the Bakken is making me a believer that more oil that will be available over the next two decades than we’d been able to forecast before. There’s been evidence of this in the past but now it’s being put into practice to a greater degree.

For many years I lived and worked throughout California’s Central Valley. The oil-producing fields to the west of Bakersfield were a constant source of amazement to me as someone who minored in geology in college. The estimates of the field and its productivity continued despite the forecasts of depletion. The Kern River Field was supposed to have fallen off in production in the 30’s, 40’s, 50’s and especially the 70’s and 80’s.

Today Kern River still forms a foundation of the strategic national reserves. Chevron began injecting steam underground in the 60’s and today the formation still yields about 80,000 barrels per day. It was a harbinger for what we see today as the unprecedented emergence of “tight oil” – petroleum that is brought to the surface through new technology both in new discovery fields and old fields that were thought to be defunct.

That’s what’s going on in the Bakken which I doubted was a significant or long-lived contributor to oil production. Today we know that it is and while so-called “cheap oil” – where you punch a hole and oil and gas flow to the surface – could be gone the creation of new reserves is going to be with us on an increasing basis.

Oil over $200 a barrel? Less probable if geopolitical events don’t cause problems in the Gulf. But I think the planet may have been blessed with some more time to use fossil fuel reserves while it makes the transition to sustainable sources of energy.

Energy Prices: Why Have They Moderated?

It’s seldom that I work with a client not affected in some way by energy prices. Whether it’s the shipping costs of manufacturing, input costs of agriculture, or even the impact of higher transportation expenses on business to consumer organizations this question about the future often plays into strategy and preparation for the future.

Everyone wants to know the future price of a barrel of oil or of a kilowatt of electricity. Like most forecasts the calculation is complex and the range is wide depending on the timeline. OPEC policy, supply, demand, new discoveries, emerging technology, consumption behaviors, geopolitical events can all have a bearing or effect on energy price.

For several years I’ve been tying the price forecasts to global economic performance. This has been especially true as the globe goes through the most dramatic economic cycles since early in the last century. In fact, I’ve been forecasting a semi-permanent rise above a $100/barrel price floor sometime between 2011 and 2015. I still hold to it.

Many will ask what’s driving down short term spot prices in oil. Good question. Typically these short term fluctuations are driven by buildup in supply and the hidden effect of economic downturn and consumer behavior. That’s what’s been going on lately. I believe it also has to do with the discoveries of fairly large but very expensive sources of oil in the Western Hemisphere. Bakken oil (or “tight oil”), Alberta tarsands, and offshore Brazilian potential are all examples.

These “tight” and “dirty” sources have put off the depletion of other sources in the recent past. Eventually, however, the inexpensive oil sources are going to wane further and the price is going up. I believe to a fluctuating, often volatile range from $100 to $150/barrel.

Whether I’m right or wrong about the forecast is less important than preparation. I’m fond of the statement denial is not a strategy. That’s why I’m bemused, surprised, or sometimes frustrated by organizations that find reasons to deny any possibility of what would be painful developments. Those that believe the relatively inexpensive energy we enjoy today is going to be with us for the foreseeable future are in that denial.