OIL: DECOUPLED, UNHINGED, OFF THE CHARTS & RUNNING OUT

For a guy who hasn’t wanted to say much about Peak Oil in the past, Daniel Yergin sounded pretty “peakish.” He reminded his audience of the U.S. National Petroleum Council’s prediction that world energy consumption will likely increase by 50-60% over the next quarter century and said, "Meeting that demand in an environmentally-sound way will be a very major challenge for all energy-producing countries, including both Russia and the United States…And the results will have a decisive impact on how nations define their energy security and what they do about it."

Clearly shying away from any concrete prediction of disappearing oil sources, he still was essentially saying there is no more cheap oil.

Oil Prices Becoming Decoupled
Cambridge Energy Associates, October 29, 2007 (RigZone)

WHO
Dr. Daniel Yergin, chairman, Cambridge Energy Research Associates (CERA)

There DOES seem to be a trend here. (click to enlarge)

WHAT
Yergin said the price of oil is “decoupled” from basic supply and demand dynamics at an "Economics and Geopolitics of Russian Energy" symposium.

WHEN
Yergin’s talk was October 29.

WHERE
- Yergin’s talk was at Georgetown University’s Center for Eurasian, Russian and East European Studies.
- Yergin stressed the urgency of helping the players work out the tensions surrounding Russian natural gas supplies to Europe.

WHY
- Yergin said there was a “strong anticipation” of $100/barrel oil.
- Yergin indicated the tension between Iran and US/European governments and tension between Turkey and the Iraqi Kurds were examples of geopolitical events not directly related to supply and demand matters yet still affecting oil prices.
- He said the weakening dollar is aggravating the situation and pointed out that inflationary international economics might also be driving the price of oil though not so dramatically as geopolitics.
- Yergin also talked about Russia’s importance in world oil and recommended CERA’s “Securing the Future: Making Russian-European Gas Interdependence Work.”
- He described the rising costs of producing oil, pointing out that it would cost 70% more for a new oil project today than just 3 years ago.

Yergin earned his prominence with this Pulitzer Prize-winning masterpiece.

QUOTES
- Yergin on geopolitics and the price of oil: "Oil prices are becoming increasingly decoupled from the fundamentals of supply and demand…the oil market is showing signs of high fever, stoked by fears of clashes in the Middle East and resulting disruptions of supply…What we're seeing in the oil market today is rooted more in the cauldrons of geopolitics and the impact of financial markets, expectations, and psychology than in supply and demand…but these are real factors…The oil market may be only one or two events away from $100-plus oil…"
- Yergin, on Russian oil supplies: "While there has been so much attention around the world to the rapid increase in Chinese oil consumption, the growth in Russian oil production between 2000 and 2006 -- 2.9 million barrels per day – exceeded the 2.5 million barrel per day increase in Chinese oil demand over the same period…But while Chinese consumption continues to go up, Russia's increase in output is flattening out rapidly owing to swiftly rising costs and very high government taxes on oil production.
- Yergin, on hidden causes of the rising oil price: "Although publics and governments around the world are focused on prices, one of the most important factors in the world oil industry is the rapid rise in costs owing to shortages of people, equipment and skills…The increased costs are leading to delays and postponements of oil and gas projects…which is affecting the timing of future supply."