Block’s Indicator of Sustainable Growth

Goldman Sachs’s oil analyst Arjun Murti was right on the money about crude oil prices. Back in March 2005, when the oil price was US$ 55 a barrel, Murti correctly forecast that the black gold could spike up to $105. The oil price has currently increased further to around $145.

Last month, Murti put his forecasting hat back on again and suggested the possibility of $150-200 a barrel, increasingly likely over the next six to 24 months. The current president of oil producers OPEC is also suggesting the likelihood of $200.

The silliest thing would be to dismiss Murti’s forecast out of hand. He is one oil analyst with a good record of anticipating future prices, and he wouldn’t be working for Goldman Sachs, which trades oil if he wasn’t good at his job.

I’m not surprised by the jump in oil prices to record levels. I am a strong believer in peak oil, which says that the world oil supply is fast reaching peak level, and taking the annual depletion factor into account, supply will soon start to fall. Oil demand continues to grow strongly and will start to outrun the available supply.

Remember the days of oil at $16.70 a barrel. That was last on November 19 2001. It then rose up to an average of $72.36 in 2007. Record prices have failed to stem rising consumption in China, India and other developing countries.

Estimated Oil Production to 2030
Annual Rate –Regular Oil

Heavy etc includes tar sands and oil shales
Source: Association for the Study of Peak Oil and Gas (ASPO) at May 2008

If the ASPO estimates prove correct, there will be a large oil shortfall between demand and supply by 2030. These estimates have been attacked by the oil industry. OPEC, the Middle East oil cartel in its latest forecast (July 10 2008) predicts world oil demand rising to 113 million barrels/per day by 2030, with non-OPEC oil supply reaching 60 million barrels/day. Of the total, 11 million b/d would come from unconventional oil, mainly tar sands from the large Canadian deposits, which would be very costly to produce.

Says OPEC: “With a large and increasing resource base, together with the vast amounts of unconventional oil, availability is not an issue. There is enough oil to meet the world’s needs for the foreseeable future. What is an issue, however, is the deliverability of the required oil. It is here that the industry faces several key challenges, as well as associated opportunities.”

Whichever scenario works out- whether a shortfall in oil supply or more adequate oil supply by 2030, the price of oil will keep on increasing, making it a burden on the world economies. $200 a barrel is a near term goal, and the price will keep on rising.

The CSIRO, Australia’s scientific and industrial research organisation estimates in its July 11 2008 report that in the most extreme case, an oil price of $A8 a litre by 2018 is possible if oil production peaks. As there are almost 159 litres in a barrel of oil, the astonishing price would work out at $1,272 a barrel.

Americans complain of gasoline at nearly $4 a gallon, not realising that in most western countries it sells for much more than that. So, what would you do if oil prices rise even more strongly to say $6 or $8 a gallon

US sales of gas guzzling SUVs along with pick up trucks have been falling off dramatically. One Denver showroom was desperate enough to offer a year’s free petrol with each new SUV, and he wasn’t rushed. Michael Jackson of car retailer Autonation is quite emphatic when he says that “the era of the truck-based large SUV is over.”

Lumbering big American vehicles are being bypassed by the more compact fuel efficient four cylinders, whether from American assembled Toyotas and Hondas, or from Asian imports. In some cities, sales of hybrids have been soaring to the extent that Ford has now joined a market opened up by Toyota and Honda. General Motors has set up a dedicated department to produce hybrids and electric cars, and both Mercedes and Audi will also join the race in hybrids.

Hybrid cars, which complement gas engines with electric motors to improve gas mileage is one answer to impossibly high gasoline prices. What about an all electric car as a solution to cheaper transportation costs? The Americans took an early lead with the first electric taxis to be introduced in New York City in 1897. Believing that electric cars was the next big thing, the great inventor Thomas Alva Edison in 1899 began a research project to create improvements in the alkaline battery, but he abandoned his experiments a decade later.

In 1900, 4,182 cars were produced in United States, of which 28 per cent were electric, and in that year electric cars represented about one third of all cars on New York roads. But this promising start soon came to an end, with Henry Ford’s introduction of the model T mass produced gasoline driven car, and the 1912 invention by Kettering of the first practical electric auto starter.

A brief honeymoon with the electric car came in 1966, when the US Congress introduced a bill recommending the production of electric cars, and a poll found that 33 million Americans would be interested in buying such a car. The biggest advocate of a hybrid electric car, Victor Wouk built a full powered hybrid with a Buick supplied by GM, but this program was killed off in 1976. In 1999, Honda produced 300 electric cars in California at the request of the state government, but then abandoned the project.

What about the promising research in hydrogen fuel cells? When can motorists expect some good news? Canada has been an early leader in fuel cell and hydrogen research, and Vancouver has the world’s largest fuel cell cluster. The American Government has also committed substantial resources to fuel cell research.

But early commercialization is still years off. David Ghosh, director of science and technology at the National Research Council’s Institute for Fuel Cell Innovation in Vancouver (May 1 2007) said that in terms of visibility, automotive uses capture people’s imagination. It’s a huge market, but the cost has to be low, and the durability high. Ghosh says: “The automotive application is probably going to be the last one to be commercialized.”

It is thought that commercial applications will start in a niche market, like backup power for telephone towers and data centres. Ghosh says “we’re in the demonstration stage. The issue has been cost. Hydrogen power currently costs two to five times higher than today’s energy costs. Conventional energy costs around $600 to $800 per kilowatt. Energy from a hydrogen fuel cell costs about $2,000 per kilowatt.

The need is to get the cost down by about two to four times. Can we expect a hydrogen fuel cell powered car by 2020? Possibly, but at the snail pace of current development, it may not happen. So, the only good news is to rely for now on a hybrid car, and hope that if all the car companies join the hybrid movement, an all-electric car will eventuate.

The shock of high oil prices is in turn driving up the price of foodstuffs when you allow for the rising prices of diesel on farm costs, which is a double blow for the consumer.

You could put your gas guzzling SUV into retirement and invest in a fuel efficient car along the lines of Toyota, or Honda for a start. If you want a car to run around your neighbourhood for ferrying the kids to schools, or shopping at the supermarkets, there are a few models of electric cars available. Such as Zac which imports electric cars from a supplier in China. The Zac people claim

Hybrid car technology complement gas engines with electric motors to improve gas mileage, or to increase power through the use of a combined propulsion system. Most car makers are now working on a hybrid, and the number on the market will grow sharply, as the demand and competition grows substantially. The website CNET.com features the top hybrids on the market.

Wayne Cunningham, senior editor in a report dated June 2007 ranks the cars on great gas mileage and good performance. The three “spectacular” models were three Toyotas comprising the 2008 Lexus LS, the 2007 Toyota Camry Hybrid and the Lexus GS four wheel drive sedan. In the “very good” category, were the 2007 Honda Civic hybrid, the 2008 Mercury Mariner Hybrid, the 1006 Honda Accord hybrid, the 2006 Lexus RX, and the 2005 Toyota Prius.

oil barrel, $200, oil producers, OPEC