The Coming Oil Bubble

The following interview was published by Venster, a Shell Oil Co. Dutch-language magazine produced for circulation internally with in the company. The interview is with Shell Oil Company's CEO, Jeroen van der Veer, and was translated into English by Rembrandt Koppelaar, president of ASPO-NL and contributing Editor to the Oil Drum: Europe. I acquired the interview from a Blog post to the European Tribune that had added commentary by Jerome a Paris. For this Blog I am not using Paris' commentary but have removed his and added my own. I have rewritten some of the translation to correct some of the improperly written English. I made sure that none of my changes had any affect on the meaning of the translation.

The purpose of this post is to point out a very disturbing trend in oil pricing. There has been much speculation in the media and in the blog sphere that the price of oil today reflects a shortening of supply directly attributed to peak-oil having been reached. The interview with Jeroen van der Veer indicates something radically different is going on. My speculation is that he is right and that the consequences could be dire if unheeded.

Q: It appears as if it is taking much longer to develop new oil and gas projects.

Jeroen van der Veer: "It is quite clear that the active interest that governments show is leading to project delays. Negotiations on the share of profits from the governmental side are taking much longer then before. One would think that higher oil and gas prices will lead to an acceleration of decision making, in reality the opposite is happening. On the longer term this is having an influence on the speed at which new projects can be put into production."

In this response Jeroen van der Veer clearly puts the development of new oil projects in the relationship oil companies have with oil supplying nations. He says that the problem of developing new oil and gas resources is being caused by oil companies not being able to reach agreement on profit sharing quickly enough. He is not saying that supplies are dwindling, but rather that governments are not reaching extraction agreements with the oil companies at the same pace as before the rise in oil prices. He is saying that peak oil in not the cause of the slowdown in production, but rather oil producing nations are causing the current imbalance in supply because they are taking longer to come to agreement with oil companies on how to share the profits of new extraction sites.

Q: These delays are occurring at the same time as the natural production decline of oil- and gas fields continues and as the demand for energy is rising. The "peak oil" theory does seem to be correct.

JvdV: "The peak oil theory, as it was first published by the old American Shell employee King Hubbert, is correct, at least for the easy oil [easily extractable conventional crude]. But Hubbert did not have the Gulf of Mexico on his radar screen. Neither did he think of the oil sands in Canada. For the Oil Sands a peak oil theory can also be formulated, but for the moment we are still at the beginning of it. And there are many more unconventional sources that can be developed."

Here van der Veer states that peak oil is true only to the extent where easily extractable conventional crude oil is concerned. He points out that deep wells such as those in the Gulf of Mexico, Oil Sands of Canada and many more unconventional sources of oil can be developed, thereby pushing the peak oil scenario well off into the future.

Q: But the world is currently running on 85 million barrels of crude oil per day. Mostly from easy oil which is not so easily substituted by unconventional sources.

JvdV: "Correct. A considerable amount of knowledge and know-how needs to be developed and large investments need to take place in unconventional oil projects. We have said that in 2015 around 15 percent of the oil production of Shell should come from unconventional sources. Already the oil industry is very capital intensive and that will only increase - it will become a gigantic investment industry. My proof for all of this? The world in 2015 will use more energy than today and for every barrel more investment will have taken place, and that trend is not going to end in 2015. A growing world population and growing welfare are different types of `inconvenient truths'."

Here van der Veer says that oil is becoming more capital intensive as it moves towards the future. He says that this increasing capital intensity is a process that has already been taking place and that this is a natural course for oil and not a surprise. He says that Shell already has plans to get 15% of its oil by 2015 from unconventional sources. He says that demand is growing because populations are growing and there is growing industrialization, which he referred to as welfare, and that those two factors will keep prices for oil where extraction can be paid for even when coming from unconventional sources.

Q: Does that mean that `100 dollar oil' is just the beginning?

JvdV: "For our investment decision we are in any case taking a much lower oil price to see whether projects are worth investing in. The "difficult oil" can easily be produced on a sound financial basis at much lower oil prices than 100 dollars.

The nearly mythical hundred dollars per barrel is based in the perception of a coming shortage of capacity on the oil market. But I think that the demand for oil will react by the present high price, although with some delay. However, this will not lead to a decline in demand, but in lower demand growth. We also know that there is a lot of psychology in the present oil price. The reality is that throughout the chain no one has to wait for any oil: tankers don't have to wait to be loaded, refineries don't have to wait for tankers, trucks don't have to wait at the refinery and consumers don't have to wait at the filling stations. The physical system is functioning properly.

In addition it is an economic law that demand and supply are always in balance. Apparently not everyone is realizing this. Sometimes there are frictions, which are showing itself in the price, to which supply and demand are both reaction. This law has not been put out of business."

He says here that when Shell is making a decision about whether or not to begin a project they take into account what the oil price should be. Currently, he states, that the price of oil they use as a measure for extracting from unconventional resources is much lower than the 100 dollar price oil today. He clearly says that the $100 a barrel price of oil today is due to a belief that there is a coming shortage of capacity in production (peak oil). He says that market demand will react to high priced oil, but he believes that oil demand will not decline but rather just slow down in the rate of growth. He says that there isn't a shortage of oil anywhere in the entire supply chain today causing the price of oil to rise.

Q: According to the International Energy Agency in its most recent World Energy Outlook it is possible that a `supply side crunch' will occur somewhere between 2012 and 2015, at which oil supply can no longer meet demand. How likely do you find such a prediction is?

JvdV: "I don't know. On top of that I only look at whether we have sufficient opportunities as a company for our business. I am not an industry guru. At the moment I see that we have adequate resources to develop new projects. Shell currently has 60 billion barrels oil-equivalent of `to develop resources' at which we can unleash our technology. That is where my attention lies."

His answer to whether there will be a period somewhere around 2012 and 2015 where oil supply can no longer meet demand is very telling. He narrows his answer to Shell only and states that Shell has 60 billion barrels of oil-equivalents to develop (in reserve). He says that they have adequate resources to develop new projects. In other words Shell will not be experiencing the supply side problems indicated by the report and Shell will not be experiencing a peak in oil supply.

My Analysis of the Interview

I have stated in the past that one of the best gages of whether peak oil is truly a real serious concern or not can be found in how the oil company executives react to such concerns. This interview shows that the top executive at one of the largest oil companies is not worried about peak oil. He states that the current problems of new resource development are a factor of reaching agreements with the governments where the resources are located and not a factor that the resources are disappearing or not being found. He points to substantial unconventional resources available to continue production of oil and oil-equivalents and that the cost of accessing those unconventional sources are more capital intense than the easily extractable oil of the past, however, oil today is much more capital intense than oil of the past and that the trend of greater capital intense oil has been with us for some time and will continue the trend in the future. In other words Shell has already planned for increased costs in oil extraction in the future and prices for oil will reflect those costs. He pointed out that he did not foresee a drop in demand for oil because of today's high prices, but rather a slowing of the growth of demand. He pointed out that the price of extracting and profiting from unconventional sources of oil is and will be far less than the 100 dollar a barrel oil price we are experiencing today. He goes on to say that the price of oil is being pushed up by a psychological factor and not supply and demand factors, the psychological factor affecting price being a belief that oil supplies will not meet oil demand in the future (peak oil). He points out that currently there are no shortages at any point in the supply chain.

All of what Jeroen van der Veer said points to a very disconcerting prospect. This prospect is that the price of oil today is out of alignment with supply and demand cycles. In other words it is a bubble. He clearly states that his oil company is supplying oil and there isn't a waiting period on supply anywhere in the process between extractions to consumer use that is causing the increase in the price of oil. He also says that they have plenty of oil in reserve and that even with the process of negotiating to have access to develop new reserves taking longer, it is still occurring at a regular rate. He clearly believes that the high price of oil is speculative or panic driven over fears that oil will be in short supply in the future. He points out that it is this psychological factor that is driving the price of oil. In other words the current price of oil is unreasonable in economic terms and there are no real economic fundamentals holding the price up as high as it is. In simple terms it is a bubble. These factors typically lead to a market correction once the fear and speculation have run their course. Market corrections are often called "The bursting of an economic bubble" and come with some very difficult economic consequences.

A positive consequence of dramatically reduced oil prices in a sudden burst would be that the freed up money now being spent on oil would flow to other areas of the economy creating a greater spread of positive economic welfare. However, the most dire consequence that will be seen with the bursting of the oil bubble, were it to be a violent one, will be that alternative fuels and the current strong push for low carbon producing energy will suddenly see a tremendous shake-out with a great many companies going bankrupt in that industry. Investment will flow away from planet saving renewables, and investors will shy away from that type of investment for decades to come.

We need to put in place now a price floor under the current bubble pricing so that a hard correction doesn't make the pendulum swing for oil prices to far in the other direction. A correction in oil pricing is inevitable but a gradual correction to a placed soft landing to a pricing floor set at a level would be better than allowing for the extremes of market speculation and psychology to dictate where oil prices would end up. The pricing floor needs to be set where oil prices are both sustainable for oil producing countries as well as being still high enough to maintain the world's interest in renewables and alternatives. This policy approach would be the most prudent policy measure to take. Not allowing the coming oil bubble to burst completely will do everyone, especially alternative energy producers, a lot of good. This was originally posted on the Daily Kos.

Tags: alternative, Business, economics, Economy, Energy, Gasoline, markets, Oil, pricing, renewable, Sustainable (all tags)


1 Comment

Re: The Coming Oil Bubble

The bubble will burst only on certain criterias, an abundance of alternative energy to replace oil to be discovered or the world no longer can afford oil due to economic depression. (Many already started to have shortages)

I can only assume that any sharp drop in oil prices will always bounce back to much higher prices unless the above are met as the ever increasing global demand of oil will never go away. The supply as mentioned regardless if it's peak oil or other factors is going to remain tight.

Peak oil is just a theory to indicate a rock solid fact that fossil fuels don't last forever and when it reaches the limit of highest rate of extraction (regardless of when it happens) the inevitable decline of rate of oil extraction will began and there are nothing to stop the decline other then to slow it down with more "Advance Technology".

The facts are out there for everyone to see and it's just another blind propaganda to see otherwise. It's about time we start to learn how to live with conservation of oil and energy. It's not going to be easy but accepting it will pave way to a more sustainable future.

I can only speculate the oil prices will continue to have sharp correction both ways with the Tsunami Effects (Wave withdrawal before spike)

Regardless if it's a bubble, just be prepare to go sustainable.

Simon Tay.

by simontay78 2008-02-18 09:53PM | 0 recs


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