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NEW YORK (CNNMoney.com) -- The price of oil fell on Monday as fresh signs of economic weakness stoked concerns about waning energy demand worldwide.
Light, sweet crude for December delivery fell $3.90 to settle at $63.91 a barrel on the New York Mercantile Exchange.
The oil market was pressured by a report showing that U.S. manufacturing activity sank to a 26-year low last month and fell below the level consistent with recession.
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PREDICTABILITY AND SUSTAINABILITY KEY TO WORLD OIL PRODUCTION
It's expensive to develop new oil fields in most of the world -- the key exception is the Middle East. Offshore oil, an increasing percentage of world oil production and critical to future increases in supply is the most expensive oil to produce.
Lead times for developing offshore oil production is the greatest for any source of petroleum.
Increases in oil supply is critical to sustained world economic growth and increased asset values.
(I understand why OilIsMastery is feeling blue, judging by his choice of pictures for this post.)
Important concerns have been raised about the financial viability of investments in oil production at the current oil price. Oil companies have announced delays and curtailments of exploration & production projects.
Perversely, "Peak" oil advocates have reported these announcements with seeming glee, as if leaving oil in the ground is "proof" of "Peak" oil. (This glee, betrays their real agenda which has nothing to do with geological, physical limits to oil. "Peak" oil has always been about politics.)
"Brazilian Energy Minister Edison Lobao told Reuters earlier this month Tupi production costs would not exceed $40-$50 per barrel and at this level would be "absolutely competitive"." Tupi profitable even with lower oil prices, LISBON, October 21, 2008 (Reuters)
"Petroleo Brasileiro SA's Tupi field is commercially viable at an oil price as low as $40 to $50 a barrel, according to the Brazilian state-controlled company's chief executive officer. The field is viable 'in the range of one-third of the current price,' Petrobras CEO Jose Sergio Gabrielli told reporters today at the World Petroleum Congress in Madrid. 'The field is viable at a very reasonable price.'" Petrobras's Tupi Viable at Third of Current Oil Price, MADRID, July 3, 2008 (Bloomberg)
Ultra-deepwater, ultra-deep driling is close to the edge of economic viability. Oil prices need to stay above this viability level.
Oilfield services prices may temper a bit with this price collaspe, which will relieve upward pressure on exploration & development costs of new oil fields.
Feast or famine has always had a cold hand on the oil industry's shoulder.
So, what is key to sustained increases in oil production for a growing world economy?
Predictability and sustainability over the long-term are key.
That has been the theme I have tried to write to on the Oil Is Mastery website.
Abiotic Oil theory is reasonable and sustainable only on it's scientific merits.
Clear-eyed assessment of reality is demanded.
Speculation on oil futures by people who have no intention of taking delivery of oil has caused a volatility that has little relation to basic forces of supply and demand -- yes, recently demand has dropped, but not in proportion with the price.
Speculators "bounced" the price and it wasn't sustainable.
That's why I suggested revisting the policy of limiting long-term oil contracts to those with a demonstrated business need.
Speculation in oil damages long-term predictability and sustainability in the oil industry.
Yo-yo's in oil prices retard general economic growth.
(I suppose OilIsMastery thinks I'm a damn Socialist for advocating restriction of oil speculation -- I'm not.)
Economic growth hopefully will be stimulated by lower energy prices, which will in turn gradually raise oil prices and fuel steady investment and increases in oil production with rates of return that further stimulate added investment in oil production.
(Sudden price collaspes threaten capital and investor equity much more than gradual prices rises, even if gradual price rises are somewhat dissatisfying.)
It's the speculators who thrive on volatility in the world oil market.
Their money would be better invested in productive companies and assets, which is the pathway to sustained economic growth.
Sustainable, slightly rising oil prices over time would be ideal for long-term oil exploration & production projects and the world economy.
Part of the problem is the dichotomy between Middle East production costs and offshore production costs, as reported, here, in the Arab News: Brazil’s offshore no challenge to Gulf oil producers.
This issue will remain, let's not compound the problem with continued oil price volatility on world markets.
Offshore oil production increases are too important to place in jepardy by continued price volatility.
WORLD OIL PRICE SURGES 10%
Seatle Times, (AP) HOUSTON - November 4, 2008, Oil prices surges above $70 in volatile week
The market wants to see oil prices increase. It doesn't take too much tea leaf reading to see any good news for the economy pushes up oil prices.
Unless the economy totally tanks, oil prices aren't likely to fall below $60 a barrel.
(Okay, my predictions have been all over the board, but so has everybody else's.)
But unless fundamentals of the economy are really screwed up, animal instincts will begin to rescue the economy to some degree.
And, again, as today's market advance shows, "some degree" is all it takes to push oil higher.
Upside down oil investments are unlikely to happen.
Energy companies as a group led the way in a general market rally of 300 points on the Dow Jones Industrial Average.
OIL FALLS BELOW $59 A BARREL
Oil Drops Below $59 a Barrel for Second Day on Demand Outlook, November 12, 2008 (Bloomberg) - "Crude oil fell below $59 a barrel in New York for a second day on speculation the International Energy Agency will cut its 2009 oil-demand forecast because of slowing economic growth.
The IEA, which coordinates energy policy in 28 developed countries, will reduce the estimated growth in global demand for a third month in a report today, according to four former IEA analysts. Energy prices also dropped because of weaker equity markets and a rising U.S. dollar."
Anything below $60 a barrel is bad for long-term investment in oil exploration & development.
$70 a barrel will spur investment, but below that, capital will have a tendency to sit on the sidelines, at least for the more expensive crude oil, namely, ultra-deepwater, ultra-deep drilling subsalt areas.
Shallow depth oil prospects are less expensive in terms of upfront investment so likely would go forward with low world oil prices.
Lifting costs per barrel are also considerably less for shallow depth oil plays.
LIBYA TO INVEST $5 BILLION IN OIL HUB
Oil prices are choppy, the two previous comments attest to that.
Although, persons knowledgable persons think the financial sector has "turned the corner", if so, then oil prices will rise on scant positive economic news.
Many investors think oil prices are below its intrinsic value to the world economy.
Libya seems to think so, as evinced by its announcement: Libya to Start Building $5B Energy Hub in January - November 10, 2008 - Xinhua Financial News (RigZone) "Libya will begin building in January a $5 billion economic zone for energy firms operating in the North African country, officials said on Monday.
The planned "Smart Energy City" is joint project between Libya's state Fund for Economic and Social Development and Bahraini Islamic investment bank Gulf Finance House.
Gulf Finance, which invests according to Islamic principles, envisages a $3.8 billion investment in the zone, to be built 70 kilometres (43 miles) west of the Libyan capital Tripoli on the Mediterranean Sea.
'The preparatory works for the project are completed and the project will be launched in earnest in January, 2009 and the total costs of the project are $5 billion,' Fund Chief Executive Officer Hamed al Houtheiri told the signing ceremony."
Another report suggesting oil investment continues and "Peak" oil is false.
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