Chinese Tightening, Irish Overhang & ITPOES at it!

It has been an interesting five days over which, most notably, analysts at Goldman Sachs opined on Monday that the Chinese government will in all likelihood employ more tightening measures on the economy but their impact on the burgeoning economy’s oil demand for is likely to be “limited.”

The Goldman guys believe a far greater near term risk will come from the “current exceptional strength in diesel demand, which could push Chinese oil demand to new highs in November and December.” Fair dues I say, but not the best of expressions when talking about Ireland.

As further details about its imminent bailout are awaited not many in the City were keen to commit further funds towards crude futures. However, some city types I know were fairly cool about both the fate of the Irish and the connection of the country's troubles with an equities overhang on either side of the pond.

From Goldman analysts, the Irish and the Chinese to the ITPOES who were at it again last week. ITPOES are of course, the (UK) Industry Taskforce on Peak Oil and Energy Security, who warned the British government again last week that a new "peak oil threat" is likely to be felt in the UK within the next five years.

The ITPOES came into being in 2008 led by none other than the inimitable Sir Richard Branson. Their latest report, which is part rhetoric, part fact, is titled Peak Oil Implications of the Gulf of Mexico Oil Spill and was released on Friday (Available here).

Deepwater drilling, they say, is expected to constitute 29 per cent of new global extraction capacity by 2015, up from only 5 per cent. The result is that any future delays or problems associated with deepwater drilling in wake of the BP Gulf of Mexico accident will have much greater impact on supply than is the case today. Wonder whether that implies the end of "cheap oil" rather than the nearing of "peak oil."

© Gaurav Sharma 2010. Photo: Oil Rig, Santa Barbara Channel, USA © Rich Reid / National Geographic

Et tu Branson? Then let's debate “Peak Oil”

One must confess that until recently all talk of “Peak Oil” theories was confined to academics, geologists, the odd government white paper or publicity literature of environmental groups worried about a perceived global addiction to oil. But these days “Peak Oil” talk is all the rage. In December, IEA belatedly joined the debate. North Sea drillers voiced their supply concerns, difficulties and increasing expenses faced while prospecting for and extracting oil in the area. The Rig building lobby has given its take too.

Now their ranks have been joined by the inimitable Sir Richard Branson. Furthermore, the Virgin Group boss has brought some friends along too. The group, rather seriously titled as UK Industry Taskforce on Peak Oil and Energy Security (ITPOES), includes Arup (Engineering), Foster and Partners (Architects), Scottish and Southern Energy, Solar Century and Stagecoach (a British transport firm) along with Virgin Group.

Launching ITPOES’ second report on the subject at the Royal Society in London on February 10, Sir Richard said, “If somebody had been able to warn the world five years before the credit crunch, the credit crunch could have been avoided. The same thing could be said for the oil crunch. We suggest there should be a workforce for government and industry to work together on addressing this problem.”

He wants the world in general and UK in particular to move from coal and oil to gas and nuclear. “We need to move our cars from oil-consuming cars to electric cars and clean-fuel cars. The government should say, 'For 2020 there should be no more oil cars running in this country and for 2015 no new cars can be sold using oil,' just to force people to move over to clean energy,” he added.

Away from the Branson babble, the group believes a “Peak Oil” scenario may potentially occur as early as 2015, with oil production levels at 95 million barrels per day. According to published statistics, including both OPEC and non-OPEC output, 85 million barrels per day were produced in 2008.

The British government issued a swift response. A spokesperson for the Department of Energy and Climate Change (DECC) denied that it is ignoring the issue but said it was unsure as to when Peak Oil may occur and was taking action to mitigate those risks.

In more ways than one, I can feel Branson’s pain. The assembled party, including all the scribes, did not hear how much worry volatile oil prices were probably causing Virgin Atlantic and Virgin Trains. Since they are not publicly listed companies it is rather hard to get an accurate picture. However, we get the idea from their industry peers.

Putting a cynical hat on, it could be dismissed as yet another publicity stunt by the Virgin boss. However, one statement of his, was quite on the spot and got nods of approvals from market commentators. Branson suggested that the credit crisis stemmed a trend of rising oil prices and delayed the inevitable spike. Before the crisis took hold, crude oil price rose spectacularly to $147 per barrel in July 2008. At one point, with the fledgling U.S. Dollar, there was talk of prices rising as high as $200 per barrel. Then the credit crisis took hold and along with a recession driven drop in demand the crude price plummeted.

Subsequently, it is also worth noting that 2009 ended with just the sort of worries about the crude oil price spikes that we saw in 2008. I suspect 2010 will end in a similar fashion. So Branson and his ITPOES have a point. Those who have debated “Peak Oil” without receiving any concrete publicity or tangible answers will now hope that the subject becomes mainstream. It is a long journey and the Virgin boss would be a rather interesting companion.

© Gaurav Sharma 2010. Photo Courtesy © Virgin Atlantic