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Petrocapita Energy UpdateOctober 2009
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Summary
There has been considerable discussion recently about the“paradox” of bonds and stocks and commodities going up together- that the bond market is predicting a continuing recession via lowinterest rates and the stock market is predicting a recovery via highequity prices. Why is the bond market behaving so strangely in theface of a huge recovery stocks and commodities – surely one of these indicators must be wrong? Maybe, but perhaps there is analternative interpretation that ts the facts.Markets always appear to act strangely to prot maximisers whennon-prot maximisers are involved. I actually feel that the behaviorof the sovereign debt market makes sense. Virtually every assetclass is exhibiting the short-term effects of a massive monetaryexpansion. Once again assets that are liquid and traded - includingLT sovereign debt – are rapidly “increasing” in price in nominalterms. Monetary authorities have expanded the global moneysupply aggressively allowing speculative activities to re-ignite viainvestment and commercial banking intermediaries and at the sametime they are busy monetizing the rapidly expanding governmentdebts - hence low interest rates and rapidly recovering equity prices.When cross-correlations between assets classes are very high andpositive we should always be asking ourselves whether we are in aperiod of liquidity/money printing induced euphoria.Ultimately monetary authorities can control exchange rates orinterest rates but not both. If they decide to sacrice exchangerates for low interest rates then, in my opinion, ination is sure tofollow.
CONTENTS
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The peak year for discoveries of giant oil elds(ultimate recovery of 500 mbbl oil or more) in theU.S. was 1930—in the world, 1962. 80% of the oilproduced in 1995 was found before 1973. We nownd one barrel for every four we consume.
Energy Update
In the last 20 years, only three elds (in Norway,Columbia and Brazil) have been found with more thanone billion barrels each. None produce more than200,000 barrels a day. From 1990 to 2000 a total of 42 billion barrels of new reserves were discovered.In the same period the world consumed 250 billionbarrels.
CHART 1:EXPLORATION - DISCOVERY - CONSUMPTION
80706050403020100-10-20
Source: Association for the Study of Peak Oil,www.asponews.org
12111098765432
E x p l o r a t o r y d r i l l i n g “ w i l d c a t s ” ( t h o u s a n d s ) A n n u a l o i l d i s c o v e r i e s m i n u s a n n u a l c o n s u m p t i o n ( b i l l i o n s o f b a r r e l s )
1950 1960 1970 1980 1990 2000Discoveries greater than consumptionConsumption greater than discoveries
GLOBAL OIL PRODUCTION - UKERC
Despite large uncertainties in the available data,sufcient information is available to allow the statusand risk of global oil depletion to be adequatelyassessed. But the available methodologies canfrequently lead to underestimates of resource sizeand overly pessimistic forecasts of future supply. TheUKERC canvassed the existing research and came tothe following conclusions: −
The rate of decline of production is accelerat-ing. The global average decline rate of post-peak elds is at least 6.5%/year and the correspondingdecline rate of all currently producing elds is atleast 4%/year. This implies that approximately3 mb/day of capacity be added each year just tomaintain production at current levels – equivalentto a new Saudi Arabia coming on-stream every 3years. An additional 1 mb/day is required to meetdemand growth. From a different perspective,more than two thirds of existing capacity mayneed to be replaced by 2030 solely to preventproduction from falling.−
A peak in conventional oil production before 2030appears likely and there is a signicant risk of apeak before 2020.
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Petrocapita Oct 2009
Petrocapita is an energy investment trust and is the second in a family of hard asset funds co-founded by the investment team. We believe that demand for energy will continue to move prices higher over the…
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