Analyst: Era of $30 oil nearing end
US, MIDLAND — Energy industry analyst and forecaster Henry Groppe says the days of crude oil prices at $25 to $30 a barrel are coming to an end.
The new era of $40 oil has begun, said Groppe, a founding partner of Groppe, Long & Little in Houston. He was speaking at a meeting of the Petroleum Information Exchange.
“We’re in an era where slowly, over time, prices are going to have to rise from the low $30s to the mid-$40s over the next eight years to balance the available supply,” Groppe said after speaking to PIE’s breakfast meeting at Midland Country Club on Wednesday.
Nearly 100 industry executives and professionals listened intently as Groppe peered into his crystal ball and said this is the year non-OPEC production (United States, Canada, western Europe, Asia) will peak at about 39 million barrels per day.
“We’ve reached the point where, maybe this year or within the next year or two, we’ll reach the all-time peak in world oil production,” Groppe said.
A maverick among energy analysts, Groppe said the world is not going to run out of oil but energy prices will rise during the long term to rein in demand.
“A simple way to understand it is this. You never run out of oil, but in the early ’70s, we ran out of $2-a-barrel oil. A few years later, we ran out of $8 oil. All I’m saying is we’ve run out of $25 to $30 oil,” Groppe said.
Jim Henry, president and chief executive of Henry Petroleum Corp., agreed with Groppe’s supply and price forecast.
“He thinks it’s going to take a price in the mid-$40s over the next 10 years. It’s not astronomical. It’s not going up to $100 per barrel. That’s the price it’ll take to keep the demand in check,” Henry said.
The global decline will mirror what has occurred in the United States, where oil and gas production flourished from 1945 to 1970 but has declined 50 percent since then.
Groppe, who founded hi Houston-based company 49 years ago, has 55 years of experience in the oil, gas and petrochemical industries. He held positions with Arabian American Oil Co., Dow Chemical, Monsanto and Texaco.
He has also served as a charter member of the Texas Governor’s Energy Council and as a director of the United States Energy Association.
Groppe’s basic thesis is all the “easy oil” has been found. Existing reserves are being exploited more and more rapidly and new reserves are too small to offset the loss from historic oil and gas assets, he said.
“So that’s what’s in store, really, all over the world,” Groppe said. “The basic question is not what is the future growth and demand going to be. The right question is how high a price is going to be required in the future to cause consumption to decline to match a declining total world oil supply?”
Groppe sees the same scenario for U.S. natural gas supplies.
The last year newly discovered natural gas supplies exceeded the depletion rate of existing reserves was 1967. Since then, Canadian natural gas imports “have solved our supply problems,” but Canada’s production is at its peak.
“If they had not supplied us, we would have had roaring gas shortages for many, many years,” Groppe said.
Groppe said rapidly declining natural gas volumes could be best offset by liquid natural gas imports and greater reliance on coal and atomic energy.
One of the answers to dwindling crude oil supplies is increased use of fuel-economy cars.
Groppe had predicted crude oil prices in the mid-$30s at this point but that commodities trading has driven it up too high.
Futures trading has also produced an “unprecedented” $7 differential between the price of West Texas Intermediate crude and the price of Middle East crude.
Groppe said he expected a return to the more typical $3 to $4 “premium” for the better-grade, more easily refined WTI in the near future.
The forecast of tightening supplies and rising prices presents a lot of opportunities for people in the energy industry, Groppe said.
“You’ve got much higher prices for both oil and gas and you can go after harder-to-find, smaller deposits.”
Exploring for and developing new reserves will be a “growing, profitable activity” even though the quantities extracted will not stop the trend of declining production.
Bob Dimit, president of Ares Energy Ltd., of Midland, said what Groppe has to say about energy’s future is controversial because his forecasts don’t simply continue supply-and-demand trend lines.
“I think he’s right on track,” Dimit said. “He looks at the underlying fundamentals. What are the underpinnings?”
On the current situation in the Middle East, Groppe said political volatility there remains at the top of his “list of surprises” that cause energy price spikes.
The countries of most concern to Groppe are Venezuela, where President Hugo Chavez is leading a “true revolution that is not reversible.”
Chavez’s ouster of the “better educated minority” that ran the national oil company Petrobras will lead to lower production than otherwise would be expected.
Political instability, social unrest and demographic changes in the Middle East and Africa will contribute to price volatility, Groppe said.
“The only kind of rational surprise that would bring down prices would be some event that reduces consumption rapidly, “Groppe said. “And the most likely one would be wordwide recession.”
An economic downturn in the United States would ease natural gas demand, and thus, lead to a drop in price, he said.
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