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Oil Prices: Another Spike on the Horizon
Jeff Rubin, CIBC World Markets
Scroll down to page 7.

Although we’ve trimmed our oil price forecast for this year to an average $50/bbl, we expect prices to begin to move up fairly aggressively as the global economy starts to move out of the doldrums late this year and next. We’re consequently maintaining our 4% overweight of the TSX energy group. For all of the markets, fixation on demand, the more important story is playing out regarding supply. Cancellations or delays in the Canadian oil sands alone will shave a million barrels from new supply in the next five to seven years.

And what’s occurring there is merely the tip of a larger shrinking supply iceberg globally. While they might have a decade or two ago, the industry’s economics don’t work these days at $40 per barrel—not when the full-cycle cost of an incremental barrel of mined oil sands production is around $90. And alternatives, such like ultra-deepwater areas of the Gulf of Mexico and Brazil’s Tupi field need sustained prices well above $60 for viability. Global oil demand, which is likely to fall by 1% this year, snapped back at around a 3% rate after two declines in oil consumption in the mid-1970s and early 1980s. Even a more modest bounceback this time, along with supply cutbacks, would see the world facing renewed supply deficits of nearly 2 million barrels per day in 2010, resulting in renewed downward pressure on inventories and rising prices (Chart 10).

Given the ongoing supply destruction taking place, we expect to see oil prices as one of the very early barometers of any turnaround in the pace of world economic growth.
(9 February 2009)
Suggested by Dr. Larry Hughes.

World Bank Specialist: The 2008 Oil Price Spike and the Airline Industry
Charles E. Schlumberger, Annals of Air and Space Law via Global Public Media


In July 2008, the price of crude oil reached an historical high level of US$147 per barrel. However, as a consequence of falling demand over the following six months, the price declined by well over 60%. This article examines the causes behind the oil price spike, which has become a serious commercial threat to many airlines. While speculative forces may have been the primary driver, increased demand by emerging markets, decreasing inventories, as well as tight production played a significant role in this development.

The article subsequently expands its scope, and evaluates two of the possible future challenges in global oil production. The first concerns a peak in production due to inadequate past investments in upstream infrastructure. The second, a peak in global supply, is based on the fact that most oil producing countries have already reached their peak output and are in a permanent decline. Both scenarios would undoubtedly lead to very high fuel prices and they present a major risk to an industry in which there are presently no substitutes for fossil fuel based energy.

By outlining data concerning global oil production and the expected growth in demand, and by demonstrating that current reserves and future increases in production are based on many uncertain factors, the article concludes that the airline industry must address the issue of energy security in the interest of its own future. The article suggests that the industry should support and adopt measures to mitigate CO2 emissions, which would also lead to a reduction in oil consumption, given the increased political pressure and public awareness with regard to climate change.

It has not been the objective of this article to predict if and when global oil production might reach a temporary or permanent peak but rather to outline critical aspects of global energy supply, especially the outlook of production and supply of fossil fuel based products, which are critical to the aviation sector.

The most significant conclusion of the foregoing is that there is a real possibility that global oil production and supply might indeed reach an untimely peak. Such a peak would be devastating, especially for aviation. Timely mitigation measures, namely reducing consumption and shifting to other sources of energy, could reduce the impact. However, initiatives proposed so far have not been implemented, and the current economic slowdown coupled with the fall of the price of oil has shifted the focus away to currently more pressing challenges.

Nevertheless, public sensitivity about climate change and global warming presents an excellent opportunity and platform to address some of the necessary mitigation steps. In applying the principles of good airmanship, the airline industry could seize this opportunity and become an active advocate of both oil and climate-change issues. This would not only restore the industry’s reputation as an environmentally conscious player but would also extinguish a potential threat.

Bio: Charles E. Schlumberger, a Swiss national, is the Principal Air Transport Specialist of the World Bank (WB) in Washington DC. Prior to his appointment to the World Bank in 1998, Mr. Schlumberger has held the position of Vice-President at Union Bank of Switzerland, responsible for international credit restructuring. Prior to his activities in financial institutions, he was the CEO of a Logistics and Transport Group in France, and worked as a lawyer on aviation related matters in Switzerland. Mr. Schlumberger graduated in 1986 with a Law Degree from Basel Law School, focusing on Aviation Law and Bankruptcy Procedures, and he received an MBA from the Harvard Business School in 1989.
(27 February 2009)
Posted with permission of author. Article will appear in Annals of Air and Space Law: Vol. XXXIV (2009).

New Taxes for Oil and Gas Companies: Where Does this Lead Us?

Gail Tverberg, The Oil Drum
The oil and gas industry is already pulling back sharply. If one looks at drilling rig counts, the number of drilling rigs operating in the United States has dropped by close to 40% from peak levels in 2008. Now changes to the tax law which would make it more expensive for oil and gas companies to operate are being proposed by the Obama administration.

What is the likely outcome? I fear it is an even steeper drop in US produced oil and gas supplies than would otherwise be the case. This drop will come primarily because of the likely impact on small oil and gas companies that dominate the US production market, especially for natural gas.
(27 February 2009)
Good discussion following the article. -BA

The final shape of the European energy market is emerging: an oligopoly

The Economist
… After several years of frenetic mergers and acquisitions, Europe is dominated by a few cross-border giants, such as France’s EDF, which is 85% owned by the French state, Germany’s E.ON and RWE, and Enel. Some countries have powerful national champions; others, such as Spain and the Netherlands, do not. Competition within markets may be largely unaffected—from a national point of view, two foreign utilities buying Essent and Nuon is better than the two Dutch firms merging, as they planned to not long ago—but at a European level, consolidation and concentration may be pushing energy prices higher, analysts say. “We’ve got an oligopolist electricity and gas market which looks a lot like the oil market—not at all what was intended,” says Mr Helm.
(26 February 2009)

Tarsands infrastructure business shifts as the economy reels

Peter McKenzie-Brown, Language Matters
Contractor Survival

The network of firms that create and maintain roads and industrial facilities make up the infrastructure business. Combined, they represent a huge segment of the modern economy. In Alberta in recent years, this business has been increasingly dominated by efforts to develop oilsands infrastructure, but since the beginning of the global financial crisis that has changed.

Infrastructure firms with contracts to design, engineer and construct massive projects like Petro-Canada’s postponed Fort Hills project have led to layoffs in professions where, a year ago, the demand was almost desperate. However, these cases have not yet been large. Indeed, many companies sense a need to rebalance the sector. Once that’s done, they say, demand for new and revitalized infrastructure will remain strong. Indeed, there is even a sense among some firms that both the province and the oilsands industry itself can benefit from the breathing room the slowdown is providing. Perhaps the irrational exuberance of the last few years really needed a pause for serious contemplation.
(27 February 2009)