There is not enough money being invested in energy to hold prices at current
levels. It costs a bundle to replace depleted sources of oil and gas. The
justification for increasing exploration budgets is hard to come by when
countries are (effectively) nationalizing companies' projects. There is also
the problem of actual production not meeting anticipated levels. And the matter
- not, by any means, confined to a single industry or country - of companies
not investing at all, terrorized as they are by our stark, raving, mad monetary
policy.
Andy Lees, proprietor of AML
Macro Ltd., has warned the sky is falling for some time, to
little avail. Two years ago, in "How
to Look for a Job," I cited Andy's projection that the cost of
energy will increase from 5% of the world's GDP to 16% of its GDP. Since then,
investment has continued to flow into fun and finance, so both the jobs and
financial resources needed to replace energy, at least in equal measure to that
consumed, have probably expanded. (Fun and finance make a riveting partnership.
From the September 25, 2012, Financial Times: "Wall Street
financial engineers have devised... an index to add financial instruments that
do not exist." This is where the nation's investment is going.)
A sampler:
Replacing oil and gas deposits
demands new capital investment. Exxon plans to spend $37 billion on exploration
during 2012. Exxon's oil and gas production fell 5.5% in the first half of the
year. Its earnings in the second quarter of 2012 were less than one-half of
those in the second quarter 2011. Some of this was due to lower natural gas
prices. Ergo, gas prices will rise.
Reuters reports Exxon's costs
of exploration are soaring. The weighted price of goods sold is falling. Exxon
will cancel exploration. In fact, Exxon decided to forego two of its six Polish
shale-gas concessions on September 20, 2012.
This is not much
in a $37 billion investment budget, but the burden of costs goes on and on.
Quoting myself from 2007: "Cambridge Energy Research Associates (CERA) estimated the
worldwide cost to produce oil and natural gas (labor and equipment) had risen
53% since 2004. In some cases the rising costs have led producers to scrap
exploration. Exxon estimated the cost of building a gas-to-liquids plant in
Qatar at $3 billion in 2004. Current estimates having risen to $18 billion. The
joint project of Exxon and Qatar has been dropped." If anyone has seen a
recent CERA cost index, please pass it along.
Exxon, of course, is not the only
frustrated driller. Quoting Andy Lees from September 20, 2012: "Highlighting the
difficulties of Arctic drilling, Royal Dutch Shell announced that it has
abandoned any hope of striking oil this year after the ice moved in. Last week
it was forced to unhook its drilling vessel from anchors holding it to a drill
site just one day after it started drilling the first hole in the Chukchi
seabed. Shell's activities in the Beaufort Sea have been hit by similar issues
which have also meant they have yet to get a drill bit into the seabed. The
remoteness, the extreme cold, the threat from ice crushing equipment and the
shortened season makes the economics shaky. "The Arctic has a high cost
of supply and it is going to take a high oil price to keep it competitive until
we can drive down the costs" according to ConocoPhilips. Gazprom has
also been reported to have shelved the development of the Shtokman gas field in
the Arctic because of surging costs. There were also reports that natural gas
bearing rock had been found off the Falkland Islands in the South Atlantic
raising the possibility of the most remote LNG plant in the world being built
if sufficient further gas reserves are found. Whether it is depths, distances,
temperatures or darkness, the environments we have to work in are getting more
and more extreme to maintain supplies."
There seems to be a consistent
tendency for energy exploration projections to come up short. In 2006, Canadian
tar sands production was expected to rise from one million barrels per day to
2.8 million bpd in 2012. Output has only risen to 1.6 million bpd. Another
example is the large Azeri-Chirag-Gunashil oil field in Azerbaijan. After a new
leg of investment was completed in 2008, production was expected to reach 1
million barrels per day (bpd). It peaked in 2010 at 823,000 bpd, averaged
684,000 bpd in the first half of 2012, and is declining at a rate of 10% a
year.
All the while, the world's economy is slowing down yet costs are rising. FedEx "an economic bellwether as operator of the
world's largest cargo airline, reduced its profit outlook for the second time
this year, citing a slower economy." (September 20, 2012) Fred Smith,
chief executive officer of the company, said: "Exports around the world
have contracted and the policy choices in Europe, the U.S. and China are
having an effect on global trade." [Not a good one. My italics. - FJS]
Within a day, FedEx announced it is increasing shipping rates an average of
5.9% on January 1, 2013.
The destructive central-banking distortions retard useful investment. This is
not an environment in which companies make long-term, capital-investment
commitments. Instead, the Federal Reserve has placed a bid under the
asset-backed securitization complex in its latest QEEEEEEE. The
tapeworms did not need encouragement. International Financing Review
reported on September 15: "The US structured-credit market exploded with
issuance in the past week, as 24 transactions across ABS, RMBS, CMBS, and CLOs
sent investors into a feeding frenzy....Twelve ABS transactions, mostly
auto-related (including three sub-prime auto deals), were marketed to
investors, with several achieving impressive over-subscription levels and the
tightest spreads in five years." On September 7, 2012, Bloomberg posted a
headline: "Goldman Sachs, Citigroup Lead CMBS Sales in Most Deals Since
'07." We need go no further.
The latest round of quantitative easing flows
to Wall Street and feeds anxious hopes of a housing recovery. That
will not happen. Prices still have along way to fall, although, in the meantime
the perversions are straight out of 2007. From the September 19, 2012, Wall
Street Journal: "HENDERSON, Nev.-The latest sign that the housing
market is bubbling to life: The artificial waterfall at the entryway to Lake
Las Vegas is again flowing. Few developments were hit harder in the real estate
crash than this mixed-use project in the desert 20 miles southeast of Las
Vegas. While overbuilding caused Las Vegas to collapse during the housing crash,
Lake Las Vegas was hit even harder. At the height of the city's foreclosure
crisis, one in every 45 homes received a foreclosure filing, compared with one
in every 13 in Lake Las Vegas. .... Hedge-fund manager John Paulson's Real
Estate Private Equity Group recently snapped up 530 acres of developable land
in Lake Las Vegas for $17 million in cash from lenders.... During a visit
earlier this summer, business was brisk at a Ravella hotel bar which has
Tuscan-inspired views of manicured hedges surrounding a fire pit, with
customers sipping martinis and noshing on pappardelle with veal
meatballs."
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