Oil and more

People have been speculating and will continue to speculate about the future of Oil. No other commodity inspires such awe and is shrouded in the mist of uncertainty as this black gold is.

So what really is the future of Oil? Will Hubbert's peak oil theory continue to hold sway? Or does incremental supply come in? Fact is, since the last decade, there have been lesser oil finds and the newer oil finds are nowhere close to the discoveries of the seventies. Not surprising, because its the law of diminishing returns. The more you discover, the lesser remains.

So what are we looking at now? Taking cognizance of EIA's forecast of a drop in oil consumption by 1.35mn bpd, the current world consumption stands at 84-85mn bpd. Considering BP's estimate of global production averaging 31bnbpd and proven reserves (we really do not know how proven they are!) of 1,342bn bpd, we are looking at a stock of oil which will last us all of 44 years!

We cannot wish away the importance of oil. It continues to command 35% of world energy mix since the past 3 decades! Furthermore, world supply can be lesser than proven reserves since a lot of that can not be meaningfully extracted. Demand has slackened for the interim, but should pick up once the economy stabilises. Prices have nowhere to go but up!

Consider another thing...geopolitics. It does play an important role. Have a look at Iraq, Venezuela, Nigeria...all undergoing turmoil with Iran being another potential candidate. Saudi Arabia has its own set of protocol for production. The US has to depend on the Middle East and Africa for oil since with its current production, it might exhaust its resources by 11-12 years. In contract African supply can last for 3 decades and Middle East for ~90 years with their current production levels.

Why did prices drop? Or rather, why did prices go up that much? Well, to put it simply, it was demand catching up with supply which was restricted since the last 5-7 years. It was also aided by some robust speculation in futures. The crash was sudden as well since the economy went for a toss. But considering fundamentals, oil prices should rebound back, as at current levels, they do not meet the hurdle rate for deep sea exploration. No exploration = lesser supply = higher prices. Though its difficult to see prices reaching UDS100+ but USD75-80 seems fair.

Adios for now. Please do share your thoughts on this.