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Consensus $200 Oil (and That’s A Lowball Figure)

by | published March 5th, 2012

Seems no matter where I go, energy is always at the heart of economic, social, and political history.

Marina and I arrived late last night to Dundee in Scotland.

While I’m here, I will be delivering a major public address at the British government’s energy research center and reviewing production at offshore oil platforms.

For the past three days, I have been ensconced in the annual energy consultations at Windsor Castle outside London.

My primary responsibility there was to provide details on the hottest new topics in Europe – shale gas and shale oil.

The attending ambassadors from Middle Eastern countries had a decided interest in discussing how shale will affect the energy balance (and market prices) for conventional oil.

And the Windsor sessions are a great place to do it.

These meetings are governed by Chatham House Rules. These confidentiality rules, established in 1927, facilitate frank conversations on contentious issues, because the opinions presented don’t carry the names of specific individuals in discussions outside the sessions.

Our Windsor consultations have been conducted this way for the past 10 years.

So without naming names, here is what we agreed upon this time.

The situation for the next several years will remain constrained and subject to intense volatility in oil prices.

(No surprise there… I have been telling you this for some time now.)

The resulting strategy we have constructed to confront these market developments provides significant upside to investors.

The further prospects, however, speak of an expanding base of new energy sources. Here, the first stage involves shale.

Comparing notes, we quickly concluded that the availability of unconventional oil and gas worldwide is much greater than forecasted even two years ago.

But these sources enable a potential oversupply in certain markets, pricing irregularities, and environmental concerns.

All of these were subjects of lively conversation.

And they brought us to one very surprising conclusion.
Rising prices of crude oil have once again provided a strong incentive to the major global producers not to diversify their economies.

If they are dependent upon hydrocarbons now, they will be even more so over the next decade.

In turn, this will translate into a further straining of budgets.

The aftermath of the Arab Spring has obliged Middle Eastern governments to boost social expenditures across the region, while renewed unrest has led to increases in military allocations and support of dissident groups (such as outside Arab support for the opposition in Syria).

Against these rising obligations, ramping up expenditures for the increased production of oil (upstream allocations) will require almost $4 trillion between now and 2035 – on a sliding scale starting at $100 billion annually.

What does this mean?

Our conclusion here is disconcerting.

The Gulf countries whose production determines OPEC – Saudi Arabia, Kuwait, Iran, and increasingly Iraq – will need an average crude price of $80 a barrel now, and more than $120 within a few years.

This is due to increasing capital outlays to maintain the flow of oil.

There will be a rise and fall of oil prices moving forward. Nonetheless, the overall trajectory will continue upward.

The consultation consensus is even worse than my personal opinion presented here in OEI on what would happen should there be a disruption in the Strait of Hormuz.

More than $200 for a barrel of crude – a figure provided by the Gulf ambassadors – was considered low by several European representatives in attendance at Windsor.

Which brings me back to the primary issues I shall confront here in Scotland.

North Sea Production is Running Out

For the past several centuries, England and Scotland may have both been a part of the same kingdom, but the difference between the two is marked. Aside from culture, history, and a general Scottish antipathy toward most things English, there is another overriding reason…

A terrible economic environment.

Unemployment and credit strains are increasing in the more populous and market central southeastern England around London. The protracted cuts in local services, education subsidies, and even childcare have created a rising backlash throughout the country.

But these conditions have been a way of life for some time further north where 40% to 60% effective unemployment is not unusual.

It is once again creating a political divide and a renewed call for Scottish independence.

Now, Scotland will likely not spin off from the U.K. given its lack of genuine alternatives.

But tension is rising.

At the core of this rising divergence is North Sea oil. The discovery of vast reserves offshore in the 1970s transformed the northeastern Aberdeen coast from a depressed local economy into a world-leading oil services center.

But the “prosperity” never translated into an economic resurrection for most of Scotland.

And with this oil now beginning to run out, the unrest is once again growing.

Oil prices will continue to rise, and the negative effect here will heighten.

There are some prospects for shale gas in the U.K. and more on the continent.

These, combined with the rise in liquefied natural gas (LNG) imports from the U.S. beginning in 2014, and already moving in from Qatar and Algeria, will usher in the possibility of another shift in the energy balance.

But what is already happening here in Scotland is a harbinger of what rising energy prices will extract from the U.S. economy unless we bite the bullet and create a national energy policy with real teeth.

We have an excellent opportunity to do just that.

The Windsor assembly was unanimous on another very interesting point.

With the combination of shale gas and shale oil, everybody saw U.S. energy self-sufficiency as attainable within a decade. The only continued imports of crude still required would come from Canada.

The table is set.

Now all we need is for the circus to leave town, and make space for some serious policy discussions to begin inside the Beltway.

However, these days, the ideological hypocrisy that substitutes for “reason” in Washington will make that easier said than done.

Sincerely,

Kent


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  1. March 5th, 2012 at 14:29 | #1

    Kent you are a breath of fresh air. This being a world need. All of us. thank you.

  2. March 5th, 2012 at 14:31 | #2

    “The Gulf countries whose production determines OPEC [edit]–will need an average crude price of [edit] more than $120 within a few years.” So in what areas will the price be less than that?–that’s where I want to invest for the long-term.

  3. Les Wilson
    March 5th, 2012 at 14:59 | #3

    I note what Kent says about Scotland and oil. However, he is wrong in saying that Scotland would not likely leave the UK. While Maggie Thatcher used the oil in the seventies to bale out the UK and indeed regenerate it. Scotland hardly benefited even having slightly HIGHER petrol costs than the south of England.
    It is hardly a partnership of equals and is leading to the Independence call, which may very well happen.
    However, I also have read a report of very large gas find off Blackpool in England. While North of England, Southern Scotland and Central Belt of Scotland have also large(ish)deposits.
    However, the report went on that there are likely deposits in the North Sea that dwarf all the rest.
    So do not put your mortgage on Scotland staying within the UK in it’s present form.Gas may be a second coming for the UK, but maybe a even bigger deal for Scotland.

  4. March 5th, 2012 at 15:33 | #4

    What are some position recommendations for 200 dollar oil?

  5. Jeff Pluim
    March 5th, 2012 at 16:15 | #5

    As I recall, weren’t you predicting $150 oil by the end of 2011? I may be off on that, but I do recall for sure that you some of your cohorts were laughing because you all felt that oil would be north of $120. The over supply of oil due to new finds, new technology, and reduced use have kept oil where it is now. The electric car market is so hot that manufacturers cannot keep up. And of course there is the revolutionary findings at the CERN facility in Geneva that will totally change how we look at energy. For those not familiar with it, in September and again in November 2011, the physicists at CERN clocked a neutrino travelling faster than light. Last year I wrote a paper telling why that is possible. It means that we will be able to neutralize radio-activity, making nuclear power plants suddenly the safest, cleanest form of energy on the planet. They will be able to neutralize radio-active contamination and even neutralize the spent fuel rods from reactors. All of a sudden electric vehicles are looking really, really good, and cheap to run. Oil will be as common as heating your home by shovelling coal. Who will want it? Unrelated to the energy aspect of the CERN findings, Humankind will be able to travel faster than light, so the sci-fi trekkies are not looking so sci-fi anymore. Due to a potential loose cable and some GPS issues, CERN will be re-doing their experiment in May. My paper and my equations predict that the results will be the same, and that they again, will track a neutrino travelling faster than light. Anyone wishing to read my paper, just email me at jeffpluim at hotmail.com

  6. James
    March 5th, 2012 at 16:17 | #6

    High crude oil prices are good news! The higher the better.

    Why?

    It would hasten U.S. dependence from Middle East oil to natural gas which is found in abundance in our own backyard and in other parts of the world. All it took was new technology (horizontal drilling and hydraulic fracking) to extract previously unavailable natural gas from the ground.

    Innovation (new competition) …. low cost fuels (economics) … all these factors come into the picture. Natural gas is the new kid on the block and it is going to change the amount we pay at the pump and the way we live.

    U.S. becomes a net exporter of energy because of natural gas, a paradigm shift. Ponder this thought and its ramifications.

    U.S. created a new energy world. It is determining its own fate and not remaining hostage to the world oil cartel. (Read the earlier post by James Baldwin: Mailbag: A Timeline for the Natural Gas Revolution.) Natural gas is a game changer. It is going to change the way we drive and live by lowering our energy costs.

    It is a just matter of time before the infrastructure is put into place and companies and we ordinary people make the switch to natural gas vehicles, etc.

    Take the pain now. Better days are ahead.

  7. March 5th, 2012 at 16:43 | #7

    It seems extremely doubtful that oil can reach $200 before severe economic recession collapses demand. It was not just a coincidence that when oil reached $147 in July 08, Act 1. of the GFC opened immediately thereafter.

  8. Dom
    March 5th, 2012 at 16:46 | #8

    Kent,

    Great insight again, always enjoy it. Had a question relating to this article.

    It mentions above that Windsor concluded there is much more unconventional oil than previously thought and that it will provide a substantial amount of supply going forward. Seems this will also play a large role in making the US self-sufficient at some point.

    My question is, will most of this oil come from onshore unconventional sources or from deepwater offshore sources or equally from both? I have read previously that onshore may be easier to access than onshore, but does not provide as big a find as offshore sources. Just my thoughts and what I’ve heard.

    Seems this is an important point to consider for energy policy as well as for us investors. Would love to hear your thoughts when you have the time

    Dom

  9. March 5th, 2012 at 17:19 | #9

    Jeff Pluim said:
    “The electric car market is so hot that manufacturers cannot keep up.”

    I’m confused; this is why GM just shut down Volt production?

    “They will be able to neutralize radio-active contamination and even neutralize the spent fuel rods from reactors.”

    Faster-than-light massless particles will neutralize radioactive contamination and spent fuel rods?

    “All of a sudden electric vehicles are looking really, really good, and cheap to run.”

    Lower electricity costs will overcome the tremendous up-front capital disadvantage from buying electric cars? Provide superior capacity-to-size performance? All this from FTL neutrinos?

    I’m sorry, I’ve only got a Master’s in Engineering, and I cannot follow you. Investing in natural gas makes sense (especially if we convert a lot of freight trucks to run on CNG) but I cannot see where any of the rest of this is coming from – or has any chance to go.

  10. Mike Hanlon
    March 5th, 2012 at 17:40 | #10

    Oil prices going to $200 will have serious consequences for many if not all economies and will tip many who are currently in recession even further over the edge of a cliff into a state of depression. The knock on effect on food supply etc. does not even bear thinking about. This will be the price to be paid for the greed consuming the energy markets.

  11. MISTY
    March 5th, 2012 at 23:15 | #11

    I DONT KNOW ALOT ABOUT INVESTING. HOW WOULD I GET MY MONEY INVESTED IN THIS.

  12. Robert Berke
    March 5th, 2012 at 23:47 | #12

    @Jeff Pluim
    Will this occur in our lifetime?

  13. March 6th, 2012 at 09:53 | #13

    Dr Kent, I am a member of Energy Sigma, Energy Advantage and have followed your news letter for about a year. I joined Energy Sigma on January 1, 2012. Up to this point I have not been able to trade. Living in China had slowed the process of opening an account back in Canada.
    My question to you is $30 dollar call for March, OIL120317C00030000, is this still a good time to buy them. Do you still expect this rise in price to happen by the due date and should.

    Best Regards
    Tim

  14. Marius
    March 9th, 2012 at 05:38 | #14

    @Jeff Pluim
    Gee, I’m not really good at introductions, so I’ll try to be short and fair.
    Two experiments showed up a freaking neutrino travelled faster than the speed of light.A third one (experiment) is on the making…Guess what?… It will prove the same! It’s true! They are already few things which travel faster than the speed of light…Einstein wasn’t wrong-he was just confined…Here! On Planet Earth!…
    Remember Lord Kelvin’s statement? ” Now, the physics have all the groundbreaking done. What’s left is for minor discoveries to fit the leftover pieces into the big puzzle!” What was he talking about? The m…f… just figured out how to liqueffy gasses!…Guess he didn’t try to liquiffy his own…But back then, THAT WAS IT!!!!
    Anyway,you may think I’m just another lunatic.Want to know two things, which everyone, every entity experience and use without even giving a thought, which already we know travels faster than light? Try gravity and thought…They are instant!…
    I can bet, in every freaking school on this governed freaking Planet, kids are teached ” cold fuzzion cannot exist”. Guess what? It’s already in use!…Somwhere in Italy…
    Tesla’s work was ditched, and discredited, and guess who was his biggest Nemessis?… The name JP Morgan crossed thru your mind?…
    But anyway, I disgress, and not that was the point.
    Now, my question to you, Jeff: we already ( supossedly) know the speed of light, and the best we achieved since we exist as a race on this Planet is what minuscule fraction of that?…
    You think if we just discovered another false limit, somehow we will step over it and somehow we all be Gods,suddenly?!!!…
    It’s only an illusion Jeff! You can dream about other planets, you can dream about conquering “The Cosmos”, yeah Asimov was probably the best thing this Planet experienced, but,and I say BUT! if nobody get up its sleeves and start really sweaten, what’s left is just a bunch of moronic dreamers.
    Coyotes are howling to the fool Moon.What you think Jeff,they just want to get there, or they just remembering something they cannot explain?…

  15. March 13th, 2012 at 18:18 | #15

    Everybody is saying that the high cost of gas is the President’s
    fault and he will not be re-elected because of it,
    Well if it is his fault all he needs to do is turn it back on, get
    elected then turn it off again.

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