In recent days and weeks I have made some predictions about gasoline prices and how the high price that you paid this summer may end up being the highest price you will perhaps ever pay. I also said that you heard it here first in The Energy Report and soon others will be jumping on this bandwagon. Well one part of my multi-faceted argument for that prediction was backed up nicely by none other than Harvard University.
As reported by Bloomberg News, a Harvard University researcher is predicting a big rise in global oil production and a major drop in price. See I told you it wouldn’t be long before the bears were jumping on the bandwagon. Just kidding Harvard! Leonardo Maugeri, a fellow at Harvard’s Belfer Center for Science and International Affairs in Cambridge, Massachusetts, said in a report that global oil output capacity could climb by 20 percent by the year 2020 in what would be the “most significant” gain in a decade since the 1980s.
"Global oil output capacity may climb almost 20% by 2020, led by gains in Iraq, the U.S., Canada and Brazil, raising production capacity to 110.6 by 2020 from 93 million barrels a day in 2011 which he predicts may prompt a plunge in oil prices."
Mr. Maugeri says that three of the four biggest capacity gains will occur in the Western Hemisphere countries that are boosting output of so called unconventional oils, the report showed. Iraq will be the only one of the four in the Persian Gulf region, pumping mostly conventional crude oil, according to Maugeri, who was director of Strategy and Development at Eni Spa, Europe’s fourth-largest energy company, from 2000 until 2010. “Thanks to the technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing, the U.S. is now exploiting its huge and virtually untouched shale and tight oil fields,” Maugeri said in the report. “U.S. shale-tight oil could be a paradigm shifter.”
The other paradigm shifter has been changing U.S. demand patterns. In fact you only have to go as far as the weekly MasterCard Spending Pulse report to see the evidence of demand destruction. According to MasterCard U.S. Fuel Consumption came in 3.5% below the year-earlier level, the 43rd straight drop in that measure. Year-to-date gasoline demand is 4.7% below 2011. Fuel use over the previous four weeks fell 3.2% below the same period in 2011, a record 66th consecutive drop in that measure.
Now I guess we can blame the economy for the demand drop but the question you then have to ask is whether things are really that much worse that they were a year ago. If the answer is no then you really have to start thinking about what is permanent demand destruction. You see the combination of long-term demand destruction as well as the emergence of new technologies is changing the face of demand. We are producing more oil and we are being more fuel efficient and that is the recipe for lower prices.
Even the Wall street Journal today is bringing up something we have talked about many times before and that is our dependence on Middle Eastern oil is becoming a thing of the past. In today’s Journal it says, "America will halve its reliance on Middle East oil by the end of this decade and could end it completely by 2035 due to declining demand and the rapid growth of new petroleum sources in the Western Hemisphere, energy analysts now anticipate.
The shift, a result of technological advances that are unlocking new sources of oil in shale-rock formations, oil sands and deep beneath the ocean floor, carries profound consequences for the U.S. economy and energy security. A good portion of this surprising bounty comes from the widespread use of hydraulic fracturing, or fracking, a technique perfected during the last decade in U.S. fields previously deemed not worth tampering with.”
The Journal in this must read goes on to say, “By 2020, nearly half of the crude oil America consumes will be produced at home, while 82% will come from this side of the Atlantic, according to the U.S. Energy Information Administration. By 2035, oil shipments from the Middle East to North America "could almost be nonexistent," the Organization of Petroleum Exporting Countries recently predicted, partly because more efficient car engines and a growing supply of renewable fuel will help curb demand. The change achieves a long-sought goal of U.S. policy-making: to draw more oil from nearby, stable sources and less from a volatile region half a world away.”
Someone ought to tell this to Obama. He has said that we can’t drill our way to energy security and as I have said before, YES WE CAN! YES WE CAN!
While in the long run this will change the face of our foreign policy and our national security, in the short run we still have to watch the unfolding drama in Syria. Brent crude seemed to rally on increasing concerns that the civil war, or slaughter as I call it, may spill over its borders and engulf the entire region. Turkey, after getting a plane shot down, may enter the fray and the region could soon boil over.
Still with the market is well supplied as it has been anticipating a conflict and at least at first the price impact may be somewhat muted. Still we have to keep an eye on developments.
We also have to keep an eye on developments out of Europe. The comments from Angela Merkel about no Euro Bonds in her lifetime seemed to get the deflationary winds blowing. Stay tuned!