63.00 USD is a supply killing level for the price of oil. This is well below the price band of 70.00-100.00 so often mentioned by global producers, from Statoil to Petrobras, over the past three years. It’s a level that’s below the calculation used by TAQA, which they have used in deals from deepwater to the oil sands. It’s a level that bruises Russian exports, crushes enhanced oil-recovery projects, and wipes out future expansion plans in Alberta. The supply killing process is now underway.
Aggravating the problem, however, is that the energy required now to extract fossil fuels is significantly and structurally higher than it was just 10 years ago. 2008 NG, and 2008 Oil bears almost no relationship to the same versions of these commodities from only just 10 years ago. Go back 30 years, and it’s like two different worlds.
Net energy is the key concept. And net energy the world over, is in decline.
To be sure, there are still places in the world where “stuff” comes out of the ground at a cost that is more closely tied to the cheap extraction costs of the past. But even in Saudi, they are no longer able to stick a straw into the sand, and start sucking. Now, they too must engage in massive engineering projects to bring on new supply. And massive engineering projects have delays.
Over at the Oil Drum, Nate Hagens is dropping hints like he’s going to take a shot at the Net Energy equation. Cutler Cleveland has already done so, in a fine piece called Ten Fundamental Principles of Net Energy. Again, very tough to quantify but the theoretical idea is as follows: it’s not so much about Peak supply or Peak extraction (though, those are indeed also key concepts)–instead, it’s about Peak net energy extraction. What is your actual energy surplus after you’ve had to blow through a ton of energy, to extract your unit of energy?
This is why many of us who do oil analysis are seeing 63.00 on the way down quite differently, than 63.00 on the way up. The point here is that a tremendous amount of true, structural change had to occur to get oil above 40.00, and then above 60.00, and then above 100.00. Those levels would not have held were there not actual changes occurring in the net energy equation. Price is just our vehicle to try and quantify the underlying change.
My views over the past two years are in total alignment with people such as Norrish and Horsnell at Barclay’s. The problem is that oil at 63.00 sets us up again for another enormous spike, as demand returns next year over a crimped supply landscape. It would be very rough indeed were oil to make a new high above 160.00 in late Q3 2009, were the global economy still sluggish. But that is exactly what could happen were oil to stay below 70.00 for another 3-6 months.
Updated: one of my readers has pointed out that supply killing dynamics are already appearing in Agriculture.
-Gregor
