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Deutsche Bank: $125 oil spike in 2012
This morning I read the Deutsche Bank report The End of the Oil Age: 2011 and beyond: a reality check. This is by analyst Paul Sankey and coauthors. Overall, the report is a pleasure to read: smart, interesting, broadly researched, well balanced. I highly recommend it to anyone interested in how peak oil is really likely to play out. Their thesis is similar to mine in broad strokes: oil production/demand will not rise too much more, the world will stay heavily auto-focussed, but there will be a shift to increasing electrification of the vehicle fleet.
There are some differences in detail in their view, and one concerns their thinking about the next oil shock, where I think they are missing a key point. Their basic schema of the next oil shock is similar to mine: as demand rises particularly in China, the Middle East, and the rest of the developing world, OPEC spare capacity will be used up, and then there will be another price spike.
To turn this general view into a forecast, you need an estimate of how fast demand will grow ahead of the price shock, an estimate of how much spare capacity OPEC has, and an estimate of how much price shock it will take to cause a break in consumer psychology and promote sharp changes in behavior on the demand side. Their demand growth forecasts are sensible. However, for spare capacity they have this chart:
One possibility is that declines in North Ghawar etc were severe enough that they simply couldn’t produce more. I lean toward that theory but haven’t been able to prove it beyond a reasonable doubt. Another fairly sensible theory is that Saudi Arabia as a matter of policy holds some spare capacity back in case of a true geopolitical emergency (eg a revolution or civil war in another OPEC member), and won’t deploy that just to moderate prices in a tight market. But either way, to argue that this capacity will be available in 2011/2012, you need a theory for why Saudi Arabia will behave differently than they did in 2005/2008. And I don’t see Deutsche Bank advancing any such theory.
And of course, if you take out that 1.5mbd, then that pushes the oil shock forward.
On the other side, of course, lately we’ve been seeing increases in non-OPEC production. The Gregor McDonald thesis that non-OPEC has surely peaked already is starting to look a little shaky. And if so, then that could push back any shock.
Another question is what price level will cause a break in market psychology on the consumer demand side. Sankey et al’s view is the market is now primed and will respond more strongly to a lower price level than in 2005-2008. Hence their view of a $125 limit to the shock (and rather a short shock at that, since they don’t show it affecting the annual average in 2012 in the graph I excerpted at the beginning of this piece). This is very much a matter of subjective guesstimation of course, but my gut feel is different – I think people have to some degree become habituated to gas in the $3-$4 range (in the US, or the corresponding ranges in other countries), and it will take a sustained break of a few months significantly above $4 to cause major shifts in behavior. So I think the shock, whenever it finally comes, will need to get into the $150-$200 range to impress people significantly enough.
One Comment on "Deutsche Bank: $125 oil spike in 2012"
Kenz300 on Sat, 1st Jan 2011 5:10 am
Every increasing dollar spent on transportation fuel is a dollar less that average working people have for food, shelter and clothing.
Will higher oil prices push the world back into a sustained recession?