whatever happened to 200/barrel oil?

[Boris Godunov]

Hey, we all have some areas named after inbred, tea-swilling aristocrats. It's ok.

[TCO]

That best not be an anti-Virginia crack.

[Flubber]

Originally posted by DanS


What Flubber says about a long-term price floor based upon the price needed by marginal producers makes a lot of sense to me, especially since the capital expenditures are so large and the lead-time so long. But it seems that he's also wrong, at least until we get into the very long term. There has never been a price floor that I have observed except the cost of production in Saudi Arabia. I don't know why this is.

I am interested to see I am wrong in my comments about price floors when I didn't make any . I can understand why DanS read my comments that way but its not accurate

I don't think there is a price floor or will be one at least not as "price floor" is defined below.

A price floor is a government- or group-imposed limit on how low a price can be charged for a product.

When I talk about "needing' a certain price for certain projects to be economic, we are NOT talking about an absolute, below which the price cannot fall. What we are talking is an "average" price over the life of the project.

In analyzing whether to do a new, high cost oil project, the price TODAY is really irrelevant (except to the extent it impacts price projections). What is relevant is the weighted average price from first oil over the life of the project. There is always uncertainty and risk in that but on the biggest oil projects, a certain amount of boom and bust in prices over time is expected. Its even "OK" as long as the weighted average is high enough.

So when I say that certain projects need prices in the 70s, I am talking an average . There can be a year or two in the 50s and that project would do quite well as long as there were enough years (particularly the early years) where oil was north of 100

I anticipate that oil prices would continue to boom/bust over time somewhere around the levels needed to bring on the needed supplies. What is needed of course is variable-- even debateable.

Right now a LOT of oil projects are getting delayed because

1. The credit crunch has raised the cost of borrowing and reduced available credit

2. The long range price forecasts are simply not high enough. I think this is partly psychological as it seems much easier to forecast 70 oil minimum 5 years from now when the price is 100 than it is to make the same forecast when its at 50.

So overall its tougher to get money at a time when oil projects don't look as good as many of those same projects looked 6 months ago.


With respect to existing projects

1. Most of the big ones keep on chugging-- The huge costs were the up front capital and as long as revenues exceed opcosts it is always better to keep going. It is actually inconceivable to stop production.

2. It is the incremental production that gets cancelled/delayed-- Additional capacity doesn't get added or you don't spend 100K on some chemical injections to squeeze out additional barrells

So no "price floor"-- Just a lot of up and down--

[Victor Galis]

Originally posted by notyoueither
I'm really quite upset about this business, by the way.

Word is some of the gold may have to be removed from the pavement to continue funding day centres for poodles in Montreal.

Well, I sure hope so. Got to get money from somewhere now that my income trusts aren't doing so well Actually mine has a good bit of it's production covered by swaps somewhere in the mid $70s. So with about 25% annual dividends, being reinvested .

On a more serious note, shouldn't the equalization payments start decreasing now though?

[TCO]

Who is Flubber? That was a good comment.

[Dinner]

In 40 years the world population is going to increase another 3 billion from its current 6 billion plus third world countries are going to continue to grow and develop. That means long term world demand for everything, including oil, is going to go up even if we find ways to reduce usage in developed countries.

We're going to need mass transit, we're going to need more fuel efficient cars, and we're going to need more efficient airplanes because the prices (even if they've gone back down for now) are likely to trend upwards as time goes on. I really hope the US doesn't follow its usual pattern and stops worrying about conservation and efficiency when ever prices drop because right now we have a bit of breathing room to implement some changes if we opt to do so.

[Asher]

Originally posted by TCO
Who is Flubber? That was a good comment.

He's a Big Oil Lawyer from Alberta, it's all you need to know.

BTW, Christians <<<<<<<< Atheists.

[TCO]

The thing that I wonder about is what is the source of the variability? In a perfect world, we would know all things and be able to predict all things, but obviously we don't, give how not just current, but 5 year futures prices move around.

Here is a list of factors, already listed these on CG. What I wonder is which are the larger factors, and are there some I've left out? Of course, it's not just immediate changes that affect price, but information even about things several years out can affect the current price.)

A. Supply:

1. Geologic uncertainty
a. "New finds" Brazil, etc.
b. Saudi Arabian true capacity (peakers allege it is exaggerated).
c. SA new finds (still occuring and significant).

2. Barriars to exploration/explotation relaxing in US (note the recent large sea change in popular opinion on this when gas was at $4/gallon. It became a real loser for Democrats to oppose drilling in that case.)
a. Off-shore
b. ANWAR

3. Advances in processing sour, heavy

4. (sorta in contravention to ([3]) Higher environmental standards on gasoline, etc. reducing the usefullness of sour, heavy (you can see some of this happening with the increasing "spread" between light and heavy).

5. Increased efficacy in accesing sands, shales, etc.

6. Substitutes:
a. biofuel
b. GTL
c. CTL
d. (more general substitutes): coal and nuclear electrical generation.

7. Cartel efficacy

8. War and other political disruption in oil producing areas.



B. Demand:

1. Outlook for developed world usage.

2. Outlook for China, etc. increased usage.

3. Global Warming legistlation reducing demand.



C. Market irrationality, emotion, not believing in insights from Hotelling, etc. (my money is on market rationality...not perfect foreshight, but rationality, but I include it for completeness...and many people tend to allege this.)

------------------------------------------------

My personal suspicion is that OPEC still determines to a great deal the price of oil.

Recently OPEC has recovered it's discipline (some things, like limiting investment in pumping capacity have helped here, versus having the capacity and trying to control releases.) Also, the war and limits on Iraq have helped. Certainly, over the last several decades, more and more oil production as a percentage of total has come to be from OPEC and specifically from PErsian Gulf, making it easier for cartel coordination and efficacy.)

Not just the current efficacy of the cartel, but even it's percieved FUTURE efficacy affect current (and futures) pricing of oil.

Both the possibility of "peace breaking out" in Iraq as well as the recent very sharp political change in US opinion on domestic drilling may have affected the percieved future efficacy of OPEC. People tend to make light of the actual amount of oil that would get pumped with expanded NA production...but in the past, cartels have been cracked by production at the margin. Once you crack the cartel, cheating by members can result in a very low, free competition price.

In this case, not just the actual production, but even the more credible threat of it can affect future (and by Hotelling, current) pricing.

This is all just a speculation, hunch, wonder. But it shows how I think about these things. And it is a hypothesis that I think needs checking out. So many others are either adherants of the market irrationality school of thought or the demand story changing school of thought. But I wonder if either of those factors can really explain the recent boom or bust.

If I'm right, we still need to think about how to keep the cartel cracked. Over time, we can still expect oil percent production to become more Arabian, so the cartel may again rise to prominence. How do we fight it (absent just stealing their oil)? There is a very large wealth transfer at stake here. And our interests and the oil producers interests are in opposition.

[TCO]

Is our ability to predict future geological supply better or worse than our ability to predict future political factors or our ability to predict future economic growth? Which factors have had the larger changes in terms of future outlook?

[Flubber]

Originally posted by Asher

He's a Big Oil Lawyer from Alberta,
.

Essentially correct (although I deal more with natural gas these days)

Originally posted by Asher

it's all you need to know.

.

Asher- Is this an affirmation of my credentials on oil issues??



TCO

while I am not a bigwig I have sat through enough meetings and seen enough approval memos to understand the factors that goes into a development decision whether we are talking a single well that can be turned on immediately or an offshore development which will not see first oil for 5 years

[Asher]

Originally posted by Flubber


Essentially correct (although I deal more with natural gas these days)


Asher- Is this an affirmation of my credentials on oil issues??

Yes

I accepted your credentials back when you PMed me years ago asking if the man you saw on one of the Big Oil organizational charts was my father. It was still one of the creepiest PMs I've ever gotten (not to say anything about the PMs MarkG sends me)

[TCO]

Intuitively, this kind of capital decision ought to factor in long term prices. And I'm not surprised that it does in practice. That's trivial. I'm more interested in thinking about what affects the prices. Why did oil take a run up and why a run down.

In terms of your personal experience, wonder how those valuations are done in terms of tactics. Do they use the implied market price (from futures) to model the future expectation. Or use their own (how generated, conservative)? How do they model the future past the longest term future contract (which is)?