Wall St and peak oil  

Kate Mackenzie at the FT's Energy Source blog has a post on financial sector awareness of peak oil - Wall St and peak oil.

Goldman Sachs famously predicted during 2008 that oil would hit $200 a barrel. Despite being a little wide of the mark (prices peaked at $147) commodities analysts at Goldman were talking in 2009 about a looming energy crisis and a shortfall as early as the second half of 2010. Although they attributed this to lack of investment and geopolitical constraints, the message was still that oil supply was at risk. Bernstein Research is another one we wrote about last year, warning about flow rates, particularly on newer oil plays.

Of course there are others who argue that supply-side risks in general are overblown, pointing to Iraq or slowing world demand. Deutsche Bank analysts, for example, wrote last year about ‘the end of the age of oil’, arguing that oil demand looked increasingly like peaking before supply did.

Sceptics of this argument will point out that information about global reserves is opaque, particularly from Saudi Arabia and other Opec nations. That is a very good point. But market participants know this. Their jobs involve poring over reports such as the IEA’s 2008 oil field survey, which made clear that its decline rates were estimates based on a sample of fields. Markets price that uncertainty in. Look at prices: crude oil has remained well above $70 for much of the past 12 months, a price point that baffled many commentators. Why should oil prices reach what are historically high prices at a time when emergence from global recession was far from assured?

Concern over investment in new production and recognition of Asia’s growing demand are part of it, but so is the decline of conventional oil supplies.

A long but very illuminating paper from the Oxford Institute for Energy Studies (which we wrote about earlier this year) comes up with a very plausible theory of what has driven oil markets in the past few years.

The author, Bassam Fattouh, points out that there are significant time lags in changes to oil supply capacity. Prior to 2002, expectations were that high oil prices would eventually be corrected by responses such as oil-induced recession or an increase in supply. But faith in these “feedbacks” deteriorated during the past eight years, he writes. Key reasons included changing notions of how oil prices affect the broader economy, but also concerns about oil production capacity — both due to declining fields, underinvestment, and increasing reliance on Opec to meet growing demand.

Another point is Opec itself. The cartel insists it needs to see oil at between $70 and $80 a barrel to guarantee adequate investment in new supplies. Yet for the most part, Opec members can reap a profit on far less than this (although the price levels required to satisfy their domestic budgetary needs is another matter).

But if the market prices oil at the cost of the most expensive barrels - such as those from say, tar sands in Canada - why not take that price? What incentive does any Opec member have to provide more reassurance about its supplies? Meanwhile Opec itself seems genuinely concerned that oil demand itself will fall away.

None of this is to say that increasingly scarce and difficult to obtain oil won’t affect markets and the wider economy. And large parts of the analyst community have missed other looming problems, like the 2007-08 subprime crisis. But the likelihood of Wall Street being completely blindsided by oil supply problems seems remote.