On the day we launched, oil hit its all time (non-adjusted) high - $92.5 a barrel. I got asked to speak at Fox, right after a panel of oil “price experts” finished a very heated dialog. The guy shouting the hardest was the anti-green guy. He made a very bold claim that the price point of $92 is over inflated by speculation in the market and that there is at least $20 of speculation in the price of the barrel. The reason for that projection – national reserves data for all countries around the world, and in particular US showed higher reserves than past numbers. That meant the US had 57 days or so of crude oil reserves in its disposal and wasn’t using them – in other words the federal governments were behind some of the inflation since they were “over-buying oil”.
I couldn’t interrupt him, as they wouldn’t let me sit in the same studio with the panel (I was pushed to a side room camera – not enough room next to the panelists). What I would have reminded him, had I had the chance is that going back $20 is merely one or two months in calendar terms. The interesting thing was the fervor with which he spoke, as if to say that oil at $70 a barrel is a cheap commodity that makes everyone happy.
Sure enough I wake up on Wednesday morning in Washington DC, to find the next headline – “Oil prices tumble to $90 a barrel”. Just the thought of the combination of $90 and the descriptor “tumble” threw me into a long laugh the entire day. Oh, by the way, by the time I took my flight out of DC on the same afternoon, the price of the barrel un-tumbled (I just can’t find a better descriptor) to $96, as we all learned that reserves in the US hit a low not seen since the post-Katrina shut down of the Louisiana refinery belt. Mind you, that $96 a barrel price, still does not factor in a single potential disaster like a Hurricane turning North-west instead of North in the Gulf of Mexico, let’s see, within the next 48 hours?
Continuing on the strong “weak signals” theme from Sunday
- China had the first gasoline direct casualty – a person in line for gasoline in a town gets beaten by people who are constrained by Diesel shortages. This is not a China problem - it is going to become a very ubiquitous problem around the world - so take the image of a man beaten for Gasoline and scale it out by 6 Billion people…you see the point.
- As result of the shortage of gasoline, China raised the price of Gasoline at the pump by 10%. This is really big news, and if the trend of oil crude continues at the same pace, more increases are on the way soon.
- The CEO of Total, the French upstream and downstream company, breaks rank from the rest of the industry and tells FT that “while reserves are still found in the ground, reaching production capacity of over 100 million barrels a day is difficult”. The reason is fairly simple, new reserves are going to the national oil companies (NOCs) and not to the major global companies any more. Countries are asking the majors who want to come into their country to focus on the “heavy oil sources” those are not only harder to get, they also have a higher carbon impact on the world. By not letting the oil majors tap into the easy oil the countries are hoping to keep those reserves for themselves for a rainy day.
If you were wondering what the oil majors were predicting on the future production targets, well check the following data out:
- We are producing 85m barrels a day (b/d) right now (that’s the great sucking sound you hear in your sleep as we gulp our planet’s scarce natural resources that took us 300 million years to convert from living matter into carbon based energy
- Oil companies predict 118 m b/d by 2030.
- We are already at virtually $100 per barrel, today at 85m. What happens as we approach 100 m b/d to the price of oil and gasoline. This is queue theory at its best. The clog that comes as result of the last buyer for a barrel of oil is just the same as the slow down of cars on a highway – the last 10% slow down the road by 50%. Yet just like on the road, the last 10% set the price higher not just for themselves but for everyone in the market.
What does it all mean – we are $4 from the inevitability of $100 per barrel of oil. There is 0% short-term market elasticity in the price of oil. We consume it the same at $1 a gallon and $3 or $7 a gallon. Why? Because our short-term decision is always one for $100 or so – should I fill up my car or stop driving from now on. When the decision for car energy is less than 1% of the cost of the car, you can never wean away from the addiction to oil. It will be interesting to see what happens in Europe, when Gasoline prices hit $8 per gallon across the entire continent (not just London) as result of this recent crude oil increase.
To illustrate, an average clunker across Europe, and there should be 100M or so cars in Europe over the age of 8, is probably worth less than $5,000 to buy. Refueling it for a year at 20 mpg, which is where the European fleet was on performance 10 years ago requires an average of 600+ gallons. As a result the average used car owner will pay more than $5,000 for car energy supply for one year – more than the car is worth. As Europe urbanization and salary diversity pushes more people into suburban and beltway living, at least 30% of the population drives 30,000 km a year. Those people, who are the ones that cannot afford the expensive living in the city, now need to either stop driving private cars or pay upwards of $7,000 for gasoline every year. Only we never make that decision ahead of time, we take the hit 50 times a year at the pump – death by a thousand credit card cuts…
The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year– talk about razor and blades businesses. Big oil still can’t supply the global demand for this concentrated energy liquid, yet the US prices gasoline less than its other concentrated energy liquid – Red Bull – when we compare on a gallon-to-gallon basis. [If you are like me you now wandered into the "how much is a gallon of Red-Bull" part of your brain...at $2 for a can of 8.3 ounces it costs $30 for a gallon...if you buy it at a club for $6 a can you are looking roughly at $100 a gallon - or 30x more than Gasoline...but then again, where do you find a gasoline that would give you the buzz-worth 15 cans of Red Bull?]
The oil companies are not evil, they merely supply our craving for freedom of drive. The bigger the population growth, the farther we are from our centers of work and culture, simply because we cannot afford the houses that require no driving in the middle of our big cities. If the oil companies would not exist, we will all run for cover as our economy would stall and our markets truly tumble. They are not a magic liquid industry – they are in reality transportation energy companies. We need to find a better transportation energy platform for them to jump to, bridge to this future, one that does not depend on magic liquids bubbling up from the bottom of our oceans and spews the carbon so neatly stored in the ground back into the atmosphere.
check out our white paper at Project Better Place