What Goes Down, Must Depart Up?

by Richard T. Stuebi

as posted to Huffington Post

Near 60 miles west of Cleveland, Cedar Point is world-illustrious for its chilling roller-coasters. All the same, Cedar Point has nothing on the oil markets.

At the turn of 2007/2008, oil was at the cusp of $100/barrel — a price that was mooted a kind of mythologic barrier, referable to its three-digit numerology. Well, it read simply a day or two into 2008 to initiate that level, and by July, oil was bordering on $150/barrrel — an increase of 50% in 6 months, and to the full 6 times the levels that triumphed simply 5 years antecedently in 2003.

And then, the bubble burst, violently: in simply the six months since the summer, oil prices have given way, falling by about 75%, to below $40/barrel.

I am reminded of the classical Vince Lombardi film clip, in which he screams out unbelievingly from the sideline, “What the hell’s extending on out hither? ” People take me, as if I should live, because I’ve been involved in the energy industry for over two decades, but alas: I can’t visualise it out. And, I’m not solo.

For instance, study the December 10 presentation given by Matt Simmons in Houston. Simmons has immaculate credentials, having served up as an analyst of the oil industry for near 40 years — and it appears as though he’s incredulous as to what he’s realizing.

Simmons laments (like many others of us) that the late collapse in oil prices — as incomprehensible as it’s been — is not a well thing. For Simmons and others in the oil industry, low-toned oil prices have done major investment projects to be acceded. For those of us more on the cleantech side of things, low-toned oil prices do the alternatives to oil to go less economically or financially attractive.

To Simmons, it is especially thwarting that the decline in oil prices have nothing to do with profound realities. Simmons notes that plumping prices haven’t been driven by any material declines in world demand, endorsing this with the comment that “all signs withal suppose [the oil market is] ‘very close’” — true cryptical, but Simmons has access to all sorts of data from unnumerable sources in the oil industry universal.

After expecting plaintively “why do we cognize so little about an issue so decisive to our well-being?”, he roots for no punches with his blunt conclusions: “Crude oil has unwell” and “Its succeeding decline could be fleet,” yielding credence to his warning that “What runs down can come up right backwards!”

The logic of his analysis intimates that oil prices cannot sustain for farseeing at $40/barrel. Simmons has oft alleged that oil at still $150/barrel is yet incredibly inexpensive — 22 cents/cup — and that Americans rattling necessitate to pay back a grip on how worthful the stuff is, and thence how expensive by all rights it real ought to be.

In an October 2008 report gentled “Ratcheting Down: Oil and the World Credit Crisis” , Cambridge Energy Research Associates late evolved an gauged supply curve for the assorted sources of oil general , and to reach production rates at current levels of about 85 million barrels per day, CERA’s work argues that prices of at least $100/barrel are eminently justifiable.

For you investors out in that location, all of this is well justification for geting a bet on oil prices buying the farm up from current levels. Perhaps you can draw a killing.

At the social level, though, the implications of toping out oil production are disturbing. A really electronegative take on the prospects is offered by an opened letter written by Nate Hagens to President Obama , sent on The Oil Drum , one of the most comprehensive resources concerning peak oil issues on the Web.

As for Simmons, he’s less inflated than Mr. Hagens, but not a hale lot more affirmative. He calls forth the perspectives of the new leadership at the Outside Energy Agency — “Current energy supply trends are apparently unsustainable,” “Succeeding of human prosperity reckons on how we take on our energy issues”, Consequences of policy/investment inaction are offending”, “Monumental investment expected”, and “Time is campaigning out and time to act is NOW!” — and fills up his presentation by adjudging that “‘Yes We Can’ figure out this black energy future, but we at present take to sprint into overhasty retreat from our addiction to oil and gas.”

How comfy are you in disregarding such good-substantiated warnings from an oil patch veteran like Simmons?

Therefore, for those of you clamoring for depleted oil prices, at current levels or even depleted, don’t bet on it. $40/barrel is probable to be an aberration.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation , and is as well the Founder and President of NextWave Energy, Inc. Later in 2009, he will as well go a Carrying off Director at Other Stage Partners.

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