Thursday, April 16, 2009

2009 EIA Conference - 2010 Bloodbath?

Robert Rapier attended the 2009 EIA Conference and brought back these observations. He was a panelist and there were no slides, so the note taking was a bit sparse. The one thing out of all this that I cued up on came from Deutsche Bank's Paul Sankey:

As always, Sankey made a lot of interesting comments. He said that while the banks might make a lot of money in a cap and trade system, intellectually it didn't seem like a good idea to him. He said he preferred a direct carbon tax. He said that we are setting up a slingshot for prices right now, but "2010 could be a bloodbath." He also said that the overall policy imperative of the new administration seems to be "anything but oil", but he believes that "attacking the oil and gas industry will be incredibly harmful to the U.S. economy." (Bold emphasis is mine)

Robert was asked by a commenter about the "bloodbath" comment and responded:

I almost wrote that I was also a bit confused by the bloodbath comment. But what I think he was saying is that we may not have hit the bottom yet (although it appears that we are well off the bottom at this point).

I take this to mean that in 2010 prices could really drop. REALLY drop! That will be an interesting development if true as I think it will lead us into a fossil fuel constrained world through the back door. Consider these reports;

Super tanker production cut

Oil price averages unlikely to rise

OPEC expects the contraction of demand to continue which the Wall Street Journal comments on

Tom Whipple's latest on peak oil and the relationship to rebuilding a sustainable infrastructure

Now, if you are proponent of cheap gasoline the notion of a "bloodbath" in oil prices might sound just peachy if it lowers pump prices dramatically. And if demand destruction is driving that move, you might think - so what? So what if OPEC shuts in production of its easy-to-get product for now. The date for permanent decline might move further away. Great news if you are going to really invest in mitigation actions but where is the revenue coming from to pay for those mitigations? People are unhappy with spending a lot of taxpayer money right now when it doesn't directly benefit them. Investments in infrastructure are expensive, long term, and doesn't always address an immediate need. Sometimes they are put in place for a need coming up on the radar. New highways vs new railways. Both are infrastructure projects. Which one do we pursue, on what basis, what cost and how do we pay for it?

Another downside, again, is the loss of revenue for investment in unconventional oil supplies by the oil industry. Remember that Petrobras is going to spend close to $175B to develop their offshore fields with an estimated date for increased production of 2013. This is very deep oil, and evidently technically recoverable. At what point is it no longer economically recoverable? The loans they are seeking will need to be repaid. Will loans be issued if the countries being solicited doubt that the future market price will support repayment?

What other fallout will arise from very low oil prices? Will they push the economy forward, or be an anchor on recovery? Hard to know, but the best that I see us coming away with is the delay of permanent decline. As I said earlier, if it gives us an opportunity to pursue mitigations then it will be worth the pain. But if all it becomes is an opportunity to resume BAU as we know it, or knew it a couple of years ago, it will be a wasted opportunity.

I have the feeling we are between the proverbial rock and hard place now, with nowhere to go.

No comments: