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Brace Yourself (and Your Portfolio) for an Oil Price Shock by 2012 Or Sooner (Part 1 of 2)

Bill Paul, Energy Tech Stocks
How ironic that, even as President Obama fights an uphill battle to convince Congress to accelerate alternative energy development despite widening budget deficits, it looks like it’s already too late to avoid a new oil price shock.

In his press conference last week, Obama said the country can’t afford to wait to tackle its oil addiction “until the next time that gas gets to $4 a gallon.” But noted consulting firm McKinsey & Co., Saudi oil minister Ali Al-Naimi, and “dean” of oil analysts Charles Maxwell of Weeden & Co. all say that an oil price shock that hits between 2010 and 2013 now appears all-but-inevitable.

Unlike short-sighted Congress – and apparently the rest of the news media, which hasn’t said “boo” about a potential new oil price shock – Obama “gets” that, as McKinsey put it last week, “As soon as we get the economy up and running again, we’re going to find ourselves in a world when (oil) prices are going to fly up.”
(29 March 2009)

CERA: Low Oil Prices Putting Supply Growth at Risk

The collapse in oil prices could end up cutting the growth in future oil supply in half from what would have been anticipated during the high price period, according to a new study from Cambridge Energy Research Associates (CERA), an IHS Inc. company. The Long Aftershock concludes that about 7.6 million barrels per day (mbd) out of total potential future net growth of 14.5 mbd from 2009 to 2014 are “at risk.”

“The inventory of potential new oilfield developments, including fields that could be developed and brought online during the next five years, remains adequate to meet likely demand in the medium- to long-term,” says CERA Senior Director Peter M. Jackson, an author of the report. “This, however, depends on sufficient and timely investment.”

The steep decline in oil prices has, so far, not been matched by an equal decline in the cost of developing new oil fields or in fiscal terms. This means the economics of a significant share of potential future oil supply growth have deteriorated to the point where it risks “being slowed down, postponed, or cancelled altogether. Slower growth in oil production capacity over the next five years could lead to the next period of rising oil prices, but much depends on the recovery of world oil demand – which CERA predicts could fall as much as 2.3 mbd in 2008 and 2009 combined – and the reaction of the oil industry and government policies.
(28 March 2009)

Decisive Action Needed to Address U.S. Oil Dependence, According to Stanford Business School Research

Press release, Stanford Graduate School of Business
Reported in this month’s Stanford Knowledgebase, Stanford Graduate School of Business researchers examine the strategic, economic, and military implications of U.S. dependence on oil. The longer the delay in taking decisive action, the more difficult it becomes to reverse the nation’s dependence, they warn.

In 2007 and 2008, the price of oil skyrocketed, hitting historic highs. The corresponding increase in gas price was felt sharply in the United States by ordinary people, industries, the military and the government. Citizens were spending more and more of their paychecks to fill their gas tanks, airlines grounded planes to avoid the high cost of fuel, and the military saw its daily price tag for the wars in Afghanistan and Iraq increase due to fuel costs. The U.S. military depended almost exclusively on oil to power its weapons and vehicles.

Economists the world over debated whether this sudden price jump was caused by supply and demand dynamics, market “speculation,” or the weak dollar. In addition, debate intensified over whether the world was hitting “peak oil,” a time when global oil production capacity would plateau.

If strategy is about gaining and maintaining control of destiny through managing the balance between influence and dependence, the United States faced an increasingly dangerous strategic situation in 2008. Although the nation had traditionally been influential in the oil industry, by 2008 it seemed that this influence had waned. U.S. oil production had been decreasing steadily since the mid 1980s, and the United States was losing clout as a customer, as developing nations like China and India began buying increasing amounts of oil. As a result, the nation was potentially facing a situation of strategic subordination.

The strategic imperatives facing the U.S. in 2008 were: 1) to gain more control of the forces driving the United States’ increased dependence on oil, especially foreign oil; and 2) to take decisive action to significantly reduce dependence on oil as a major source of energy within the shortest possible time.

To develop a greater understanding of the strategic challenges confronting the U.S. in 2008, Andrew S. Grove, Stanford Business School lecturer in management and emeritus chairman and CEO of Intel; Robert A. Burgelman, Edmund W. Littlefield Professor of Management; and Debra Schifrin, case writer and researcher at Stanford Business School, authored a paper that compiles the key facts and figures, as well as key contextual factors, to describe global and United States’ energy and oil consumption, the history and evolution of the oil industry, the global oil marketplace in 2008, and the relationship between U.S. oil consumption and national security. The authors argue that this greater understanding will facilitate taking the decisive strategic actions that the situation calls for.

(This story reports on research at the Stanford Graduate School of Business and appears in this month’s issue of Stanford Knowledgebase, the free monthly information source for thoughts, ideas and research at the Stanford Graduate School of Business. To dig deeper, visit: .)
(30 March 2009)
The original research paper is available as a PDF: U.S. Dependence on Oil in 2008: Facts, Figures and Context .