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Where Oil Prices Might Go From Here


OIL prices went up over the summer while North Sea production fell sharply. Not a good combination. What happens next?

According to a much touted forecast by Leonardo Maugeri, senior executive with Italy’s ENI energy conglomerate and currently on sabbatical at Harvard University, the world is headed for a glut of cheap oil. The New York Times ran the headline: “The Coming Oil Boom”.

Maugeri expects global production to jump by a fifth by 2020, to 110m barrels per day (bpd), as a result of new discoveries and improved extraction techniques. He predicts oil prices could fall off a cliff as early as 2015.

If Maugeri is correct, that’s good news for consumers, and very bad news for the renewables industry and Scotland’s raft of adventurous oil prospecting companies. But Maugeri’s bullish projection has been savaged by other industry professionals: 

(1) We may have reached peak oil – the point when output from existing oil reserves tappers off dramatically, regardless of new discoveries.

 Maugeri assumes output from existing oil fields will decline at only 2 per cent per annum in coming decades. Sadad al-Huseini, a former vice-president of the Saudi state oil company, thinks Maugeri is bonkers. He claims the rate of decline will be nearer 7 per cent.

 Even the conservative International Energy Agency (IEA) think tank puts the decline at 5.1 per cent per year, increasing to 8.5 per cent by 2030. If so, new capacity will go nowhere to bridge the gap between supply and demand.

(2) China’s rising demand for petrol is not going to abate, even with an economic slowdown. China represents 10 per cent of global oil consumption because ordinary Chinese want to drive cars and travel by jet. Next year annual car sales in China will surpass 20m. That’s a lot of petrol pumps.

(3) It’s a myth that the world’s lumbering oil majors are pouring capital into prospecting and refining. Haven’t you heard: there’s a global downturn.

Goldman’s David Greely warns: “It is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand.”

Don’t expect help from state producers. Putin’s state larceny means Russia will never develop its oil potential.

Meanwhile in the UK North Sea sector there’s a crippling lack of skilled workers. Oil & Gas UK, the industry association, is holding its first ever skills summit, on 19 September in Aberdeen, to troubleshoot the problem.

What about the shale gas revolution? Isn’t that supposed to bring down energy prices?

True, America now gets 94 per cent of its natural gas needs domestically and could end up as a net exporter. But US punters have over-invested in shale and are now seeing massive capital write-offs. Europe is steadfastly refusing to develop its own shale gas reserves for supposed environmental reasons - Exxon has just abandoned its Polish shale project.

Gazprom, Russia’s state-controlled gas company, has also shelved plans to develop the giant Shtokman gas field in the Arctic, blaming the impact of cheap US shale gas on world prices.

One quirk to note: oil prices remain highly volatile. Why?

Brent crude hit a high in April ($125), fell and then bounced back. Reason: there is a hair trigger balance between rising demand and a fragile supply base. Any sudden loss of production in a major field or refinery and boom goes the price. Barclays Capital expects a “monster” hike this quarter because the crude market has lost 2.4m bpd of supply due to technical failures. So much for the Bank of England’s optimistic inflation forecast.

What do oil prices mean for Scotland?

If oil prices crater, as Maugeri insists, the outlook for expensive renewables is bleak. But with high prices (which I think more likely) there will be an inevitable competition for scarce investment capital. Either way, the Scottish Government’s plans for offshore wind will be under pressure.

 On the bright side, rising fossil fuel prices should attract private equity to Scotland’s oil independents. Private equity firms accounted for a third of the $34bn invested in oil and gas in the first quarter.

And there’s still oil to be found, even if not enough to match demand. Following the Arab Spring, the Mediterranean has opened up for offshore prospecting. Edinburgh-based Cairn Energy, which generated a huge cash bonus from the sale of its Indian fields, is ploughing capital into the area. Cairn took part in the latest licensing round held by Cyprus, has plans to drill offshore in Eastern Spain, and will submit bids for offshore blocks in Lebanon next year.

The full impact of Cairn’s turn to the Med won’t be seen till 2014-15.  For now, the markets await the latest critical US oil inventory numbers, due this Wednesday (September 12).  

George Kerevan is an economist, former Assistant Editor of the Scotsman and a freelance writer and speaker.