You're reading it here on December 16, 2008. Oil prices seem the least of our worries at anywhere between $40 and $50. The breakeven point for many oil producers though is almost double this. Supply cuts thanks to OPEC (and Saudi) haven't had the sort of response a rational market ought to have.
In time, these producers will begin to burn more and more cash, and will eventually - some of them - shut down completely. Bargain basement oil prices will allow airlines and other doomed enterprises to snap up contracts (those who can afford them, and those who have good collatoral). Demand will ramp up, leading to shortages as supply struggles to come online.
During this period, we will see a convulsion worse than we saw in 2008. While suburbia are trying to recoup from 2008's stormy weather, 2009 will catch us napping, as though 2008 never happened.
I would hate to say 'I told you so' when the time comes. I expect so: our complacency so far has been exceptional.
Now that oil Demand has retracted, bringing prices down with it, the opposite phenomenon occurs: Supply destruction. Current prices are too low for the development of many oil reserves, especially those on the fringe of technology. The perfect example is the sub-salt layer reservoirs identified in the Santos Basin off Brasil. A recent study by Deloitte pointed 90 $/barrel as the break even for production from these fields. An optimistic figure possibly, given that as indicated by Brazilian scientists last year, the technology for doing is so is yet to be developed.
With time, new projects needed to offset aging fields won't be there, either because of lack of exploratory activity or lack of financing. Even healthy fields can become unprofitable and be mothballed or abandoned. Supply will go down to the point it can't fulfill Demand any more at low prices, the cycle will be closed and a new "boom" phase will unfold.
It would be interesting to know when this new cycle will start. |
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