There’s a Texas tall tale about legendary cowboy Pecos Bill who succumbed to his new bride’s pleas to ride his wild mustang, Widowmaker—a one-man steed previously ridden only by Bill. Of course, the horse bucked her off, sending her flying cloud-high. She plummeted back to earth, landing on her bustle, and its spring-like metal frame bounced her even higher. So there she was, rebounding ever higher, falling ever lower until Bill finally had to shoot her so she wouldn’t starve to death.
Sounds a lot like the oil industry, where the front-month crude futures contract plunged to intraday lows just under $40/bbl on the New York Mercantile Exchange in early December from nearly $150/bbl in July. No one imagined at the start of 2008 that crude prices would shoot so high or fall so low. And it’s impossible to guess now when—or how high—the market will rebound.
The global economy is a mess with the US, UK, Europe, and Japan simultaneously in recession for the first time since World War II. For 2009, Deutsche Bank analysts are predicting the worst economic performance among industrialized countries “since the Great Depression.” They forecast global growth rising 1.2%—the lowest rate since the early 1980s—as economic problems spread to the emerging markets.
Some economists expect the economy to remain shaky beyond 2010, undermining energy demand. But optimists talk of a possible rebound in the second half of 2009 as energy supplies fall below projected demand levels.
Tightening supply
In the final months of 2008, markets were so focused on falling demand for oil that they ignored signs of tightening supply. On Dec. 17, OPEC members agreed to bundle their previously announced cuts of 500,000 b/d in September and 1.5 million b/d in October with another cut of 2.2 million b/d for a total reduction of 4.2 million b/d effective Jan. 1. The proposed 2.2 million b/d cut would be the largest single reduction by OPEC, surpassing a 1.795 million b/d cut in the spring of 1999. But even as OPEC members again promised to rein in production, front-month crude futures prices hit a new 4-year low on the New York Mercantile Exchange.
At that time, industry observers estimated OPEC had achieved only 60% compliance with the September and October cuts and doubted that members would do any better after Jan. 1. However, analysts speculated that 50% compliance would reduce OPEC production by 2 million b/d in 2009, while 75% compliance would take 3 million b/d off the market.
Meanwhile, low crude prices are wrecking the budgets of OPEC members, many of whom need more money to fund social programs and to expand exploration and development of new fields. So they have a major incentive to shut down enough production to raise prices—but perhaps not to the $75/bbl level that several OPEC members favor.
Analysts project a 400,000 b/d decline in non-OPEC production, but if low prices shut in stripper wells and disrupt stripping out natural gas liquids, the non-OPEC loss could be 1 million b/d. In the interim, the oil industry appears virtually “on strike,” with decisions postponed, projects cancelled, and maintenance delayed. The US rig count is expected to drop 600 units in 2009. Low commodity prices may further undercut development of nonconventional resources such as oil sands. And there is always the risk of another Hurricane Ike or a political blowout in Africa, South America, or the Middle East
Meanwhile, there are signs that US motorists are reviving their driving. Although demand for gasoline is down from the comparable period a year ago, retail gasoline sales have increased with pump prices at a 58-month low in mid-December.
Gas production up
US gas production has increased since mid-2007 primarily because of key onshore plays such as the Barnett shale. US gas storage also is strong, so there is less chance of an escalation in gas prices absent a frigid winter and a sizzling summer to boost demand.
High energy prices in early 2008 renewed interest in energy conservation, but developed nations have been insulating buildings, expanding public transportation, and requiring more efficient appliances since the 1980s. Now it will take time and money to capture the last few percentage points of industrial pollution and to build a new fleet of higher-mileage and alternative-fueled vehicles along with the infrastructure to support them.
Among several wild cards in 2009 are the new US president and a Congress dominated by Democrats who were critical of oil and supportive of “green” energy during the 2008 campaign. After the grilling of oil industry executives over high prices last year, it’s not yet clear whether Congress, like Pecos Bill, may shoot a few CEOs or just starve the industry.
About this report
In this special report, Oil & Gas Journal’s General Interest editors write about their expectations for 2009. As members of OGJ’s core news team, they write and edit nontechnical articles that appear on OGJ Online (www.ogj.com) and the PennEnergy portal (www.pennenergy.com), in the General Interest section of Oil & Gas Journal, and in eight daily, weekly, and monthly electronic newsletters.
