The cheap energy is going fast

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As I’ve tried to point out many times here, since we’re apparently passed the peak of world oil production, the easy to reach, cheap to extract oil is getting scarce and the new finds contain less oil and are harder and more expensive to extract. The rosy projections of the IEA and the DOE/USGS have been proved false over the last five or six years, and the pessimistic projections of the "peak oil nuts" crowd have turned out to be right. The upshot to all this is that oil, energy and almost everything else is going to get increasingly expensive as time goes on, and take a bigger and bigger cut from your budget.

This article Oil`s slice of world GDP nears shock levels: SocGen – Reuters – quotes the chief oil analyst at Societe Generale on the situation.

Rising prices next year will push oil’s percentage of world gross domestic product up to similar levels as during the oil shocks of the 1970s, Societe Generale said on Tuesday.

Analysts at the French bank sounded a "yellow alert" in a report that hiked their forecast for oil prices by almost 10% next year, arguing stronger-than-expected demand and cheap money would raise the cost of oil.

SocGen’s chief oil analyst, Michael Wittner, said one of the biggest risks to the bank’s average price prediction of around USD 93 a barrel in 2011 is how consuming economies respond.

"The oil burden is starting to creep up," Wittner said.

"Next year, the index (oil’s percentage of global GDP) is forecast to return to the levels of late 2007/early 2008; the oil burden also returns to the lower levels of the zones seen during the twin oil price shocks of the 1970s."

The oil price shocks of the 1970s spiked inflation and pushed the U.S. economy into recession in 1973 (after the OPEC nations cut oil supplies in response to U.S. support for Israel) and in 1979 after the Iranian Revolution.

"While not clear cut, the message is that we are approaching the point where oil prices could possibly start to weigh on fragile and recovering OECD economies," Wittner said.

"This ‘yellow alert’ zone appears to be USD 90 and above — which is where we forecast oil prices are heading."

How high is too high?

On Tuesday, US crude futures settled at USD 84.11, down USD 1.62 on the day, but around USD 7 above where they traded at the same time last year. Crude rose USD 2.68 in November, extending its most recent rise for the third straight month.

Brent crude, the benchmark for Europe and much of Africa and Asia, traded just below USD 86 a barrel on Tuesday.

In the report, Wittner said prices were likely to keep rising, eventually reaching USD 100 a barrel and above in 2012.

"This is based on healthy demand growth, led by developing countries, bumping up against maturing and increasingly expensive supply," Wittner said.

"The forecast is based on declining spare production capacity within OPEC. Our projections indicate that spare capacity should fall from 4.9 million bpd in 2011, to 2.9 million bpd in 2012, to the 2.0-2.6 million bpd range in 2013-2015."

Global oil demand in 2011 is expected to average 88.51 million bpd, according to the International Energy Agency.

Based on SocGen’s predictions, spare production capacity will total just 3-4 % of daily output by 2013-2015, leaving little scope for dealing with prolonged supply outages.

SocGen forecast oil prices would average around $115 a barrel by 2015 — not far below the all-time peak of almost USD 150 hit in 2008.

Others have argued oil prices above USD 75 a barrel would encourage greater production and use of alternative energy, possibly preventing prices rising too high.

I think you might remember me saying something quite similar to the underlined quote a couple of times here. I just wish Howell would stop development for a few years to see how this all shakes out, but we’ve got to keep the pedal to the metal, the cliff is getting closer. 


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