For months now I have been debating with a friend who should have access to the best data in the world. He regularly does deals with SASOL and merchant bankers with fingers in all the pies. Yet the 'experts' continue to be wrong about predicting the future of energy prices. Why?
To some extent it is a matter of seeing the trees rather than the wood. And by wood I don't mean timber, I mean the entire forest. Energy is a huge issue, and it is easier to take a micro view that is too micro, or a macro view that is not macro enough.
But let's answer the question. Why is oil $105 and going up? Why is there no 'demand destruction?' There are a few reasons, but let's start with those that are the most unexpected.
The cheap easy oil has been extracted, and now about 50% remains. Even if you dispute that half is gone, no one can dispute that the oil that remains in the world is more difficult not only to refine, but simply to reach. These are implicit cost factors.
Another issue is efficiency. Because vehicles are more efficient and can be built more efficiently, we also become more efficient at adding additional users. That really is the problem. We need to reduce demand, and our efficiencies aren't helping - in fact more and more consumers EXPECT to have cars, including consumers in India and China who have had to go without until now. Recently an ultra-cheap, fuel efficient car has emerged in China. Even if fuel becomes twice as expensive, people will buy these vehicles and hope to travel with them as far as they can afford to.
Now we get to the area we all understand. How did you get to work today? Yes, you consumed petroleum to get here. So did everyone else. We do this each day without thinking about it, more and more users. There are a few extras we can cut off, but there is always an additional user lined up to pick up the slack.
In national terms, if the US enters a recession, China will be happy to step into those shoes, even if only to suck up available oil to grow their own economy. Sadly, China has come too late to the party, and will continue to experience chronic energy shortages. China will not fulfill their potential unless they go to war and win. And of course, this is the trajectory we face. In order to have the lifestyles we feel we're entitled to, someone will have to go without. And that is the oil/food fight that these price rises are gearing up towards.
The recent resignation of a CENTCOM general is evidence for how high the stakes are. He does not see the reason for a war with Iran. His boss, Mr. B, does. What no one seems to realise is that if the US don't go to war with Iran - not to steal their oil, just to secure access - then China will. It's a win/lose/lose scenario. Some call it last man standing.
The bottom line is that supply is shrinking and no matter what we do, no combination of technologies or alternatives, are really going to solve our addictions any time soon. The cost for this intransigence, this sleepy entropy, unfortunately, will be the new appearance of large populations of economic losers/havenots. Wealthier nations will be able to afford higher energy, but eventually wealthier nations will vie for the spoils. The point is, the expense account goes up regardless, and those who can't play will start wars.
Brent Crude right now is $106.07. I've predicted on this Blog for prices to reach $120 by July/August. That's if stock markets remain as delusional as they are now.
In the gloom, gas prices shine a light
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