Saturday, December 05, 2009

 

Crude Price: A Balancing Act?

Saudi Oil Minister Ali al-Naimi stated that the $75–$80 price range for crude is “good.” But how good is it, really? This statement needs to be examined in the context of energy cost.

It’s clear that this price range for oil is a drag on the world economy. Indeed, we are in the clutches of financial collapse, with more trouble on the horizon. But if we had cheap, abundant energy again, that would be the tonic to hold the system together longer. After all, we all know that cheap, abundant energy is the sine qua non of economic growth. So if we really want to “jump start” the economy, oil has to be much cheaper.

At the same time, energy development is costing ever more, yet investment is lagging far behind needs. The International Energy Agency recognizes this in World Energy Outlook 2009. I quote from the summary:
Energy investment worldwide has plunged over the past year in the face of a tougher financing environment, weakening final demand for energy and lower cash flow. All these factors stem from the financial and economic crisis. Energy companies are drilling fewer oil and gas wells, and cutting back spending on refineries, pipelines and power stations. Many ongoing projects have been slowed and a number of planned projects have been postponed or cancelled. Businesses and households are spending less on new, more efficient energy-using appliances, equipment and vehicles, with important knock-on effects for the efficiency of energy use in the long term.
Development of new oil reserves, for example, was falling behind the depletion rate even before the 2008 crash, so it can only be worse now owing to the worsening financial environment.

Such being the case, how good, really, is the $75–$80 price range for crude? Since we need to invest a lot more in oil field development and in oil-related infrastructure (for example, view this presentation), it seems we need higher crude prices as an incentive for more investment.

Electric power production and distribution is another matter of grave importance. Building “smart grids” and new generating capacity is going to cost more than many people realize.

All things considered, this “good” price for crude appears to be a dangerous balancing act meant to get a price for crude which allows producing countries to keep pumping for the time being, and which also allows the crippled world economy to limp along for the time being. What happens after that?



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