The CEO of the French national champion Total Christophe de Margerie has always been a very interesting character in the Russian energy market – also one of the only ones boasting a successful deal (so far) with the government on the very confusing Shtokman Field deal. With his long-standing bribery issues seemingly behind him, Margerie has turned Total into one of France’s most valuable companies – and oddly, he is a peak oil believer. In this news clip, de Margerie discusses high oil prices in the short- and long-term, and shares some interesting if not controversial views on the industry. For a better constrasting breakdown of what’s driving prices (it’s not exactly supply shortages or speculators), Ed Crooks has a very intelligent article in the recent FT Energy Report, which I have excerpted below.
From the Financial Times: Industry witnesses a ‘structural shift’ by Ed Crooks :
As the price of oil has soared far beyond what seemed likely even six months ago, the search for explanations has become increasingly desperate.Many of the purported reasons for its spectacular ascent are deeply flawed.Some believe that “peak oil” – the point at which the world’s oil production can no longer be increased, and begins to fall – has been reached.It is a proposition that can only be tested in hindsight, but the strong form of the hypothesis – which suggests that oil production is peaking because the geological limits of available resources are being reached – does not command general support.It fails to explain why prices of natural gas, which is in more plentiful supply than oil, and coal, which is in much more plentiful supply than either, have also been racing higher.Others blame “speculators”, a view that has been long propounded by Opec, the oil producers’ group, and has been gaining increasing political traction in the US and Europe.The most naïve forms of the argument are easily dismissed. Critics of speculators point to the increasing volume of trading in the futures market, missing the point that every forward purchase of oil must also be a forward sale.More sophisticated versions do not fare much better. Financial investors have built up growing long positions in crude oil in recent years, but the fit between buying by those “speculators” and jumps in the oil price rise is poor, as far as one can tell from available data.Markets other than oil provide telling evidence against the theory of powerful speculators.US domestic gas prices, as measured by the Henry Hub contract, have risen steeply in the past year. But financial investors have been substantial net sellers in the futures market over that period.Meanwhile prices of commodities in which there is essentially no activity by financial investors, such as rice, have also been rising sharply.If speculation were forcing prices artificially higher, there would be mounting stocks of real crude oil, as the physical market failed to clear at the inflated speculator-driven price.With some exceptions, such as the stock of Iranian high-sulphur crude that has been waiting on tankers trying to find a buyer in recent weeks, that has not been happening.So if neither exhaustion of resources nor financial manipulation is the reason, what is?The most telling piece of evidence is the number of different commodity prices – not just energy, but metals and foodstuffs as well – that have risen.The common factor in all of these markets is the rise of the economies of Asia, the improvement in living standards and development of economies that have created a structural shift in global demand. As Mr Miller put it: “The past 10 years [1997-2007] saw China’s energy consumption almost double and India’s grow over 1.5-fold.“Asia has replaced bikes with scooters. What about the next step to cars?”Rising demand has reached the point where it is putting enormous strain on the industries struggling to sustain supply.That is true in agriculture, where it takes time to bring land into production. It is even more true in energy, where projects have lives measured in decades, and can easily take 10 years from first concept to the start of production.Lack of investment during the past two decades is the common factor behind: shortages of power generation capacity and network connections; long waiting lists to buy wind turbines; constraints in shipping coal around the world; the lack of refineries to turn crude into diesel; the shortfalls in production in many oil-rich countries.Now that the price of all forms of energy is signalling that there is an urgent need for investment, a surge in capital spending is trying to squeeze through a narrow aperture in terms of skilled staff, materials and capacity in the supply chain.The result is that costs are soaring and the investment is not delivering the results that had been hoped for.