Dark Clouds

Two of yesterday afternoon’s panels at the Herold Pacesetters Conference really epitomized why I love to attend sessions like this. They dealt with geopolitical risks to energy supplies and the “megatrends” facing the entire energy industry and the wider world. In the interest of time, since I’ve ducked out of another session to write this posting, I’m just going to list some of the insights and sound-bites that caught my attention from these panels:

• The panel on geopolitical risks included a presentation on an interesting tool for quantifying those risks objectively, and I plan to come back to that in a later posting. But another presenter provided some useful advice about not getting so focused on understanding the risks that we fail to plan our responses to common outcomes that could arise from a number of different events. If the market is short a million barrels per day, how important is it that it happened because of country X’s policies or because of a natural disaster, compared to making sure we can handle such a shortfall from any cause?
• Cliff Kupchan of the Eurasia Group provided some insights into the upcoming transfer of power in Russia, suggesting that President Putin may surrender the Presidency, but that wherever he ends up may become the new center of power. This has implications well beyond energy.
• Mr. Kupchan also discussed Iran. He sees two competing clocks ticking down in that country, the nuclear clock and the reform clock. Whether we end up with an application of “kinetic policy”—a euphemism for military force—may depend on which clock is running faster.
• In the panel on megatrends we heard about resource depletion and the prospects for Peak Oil, which hinges not just on the oil in the ground but on the capacity to produce it. If the international oil companies can’t access those resources, and OPEC lacks the internal funding or motivation to build capacity, we could end up with a peak, regardless of the remaining reserve levels.
• One indicator of the progress towards such a state is the steepening curve for per barrel capital costs in the oil industry. This suggests diminishing volumetric returns ahead, and the prospect of really severe price increases to destroy the demand that can’t be met. That could be especially painful for the US, since so many consumers around the world are buffered from oil price changes by controlled markets and high taxes.
• There was also a brief discussion of a recent prediction that oil prices could be about to peak and return to $45/barrel, though that view didn’t get much credence on the panel or with the audience.

If this all sounds like doom and gloom, that’s the nature of the way we tend to look at risks. If there are bright spots in this outlook, they may have to come from non-conventional hydrocarbons and alternative energy, the subject of my panel this morning, which I’ll cover in tomorrow’s posting.