The end of cheap oil

As China, India and other emerging economies continue to grow it is simply not possible for oil production to keep up, according to Candice Beaumont, a managing director of L Investments, a leading single family office with substantial investments in commodities.

The US population of about 300 million out of a global total of seven billion currently consumes around 25% of the world’s oil, so it is “unclear where the incremental oil is going to come from”, she said at the inaugural Asian Commodities Investment Summit, hosted by FinanceAsia and AsianInvestor, in Hong Kong yesterday.

L Investments is a firm believer in “peak oil”, which maintains that the energy resource is depleting at such a rate that more than half of the earth’s accessible reserves have already been exploited. Even technological advances in extraction and refining will be insufficient to curb significant price increases as easy-to-reach wells dry up, forcing oil companies to drill less profitable wells. The theory was first popularised by a Shell geologist called Marion King Hubbert in the 1950s, and has been taken up by others since then — notably, argue critics, when production volumes in subsequent years have defied his predictions.

Nevertheless, Beaumont insisted that Opec countries recognise that the era of cheap oil is over, and that all are aware that their largest oil fields are declining at a rapid rate. New technologies are certainly making it possible to extract previously unreachable deposits, but not enough to meet increasing demand.

Beaumont overseas all capital allocation decisions for L Investments' fund of funds as well as the direct investment portfolio. She has a background in investment banking and private equity, and is a member of the Independent Petroleum Association of America.

The supply situation is so perilous, she argued, that the “world actually needs slower growth in order to keep the oil price at equilibrium”. Indeed, it would be “a long-term blessing for the oil market”. Supply disruptions in North Africa and the Middle East, in particular the world’s ninth-biggest exporter Libya, has also affected capacity, putting further upward pressure on prices.

Beaumont pointed out that the major Middle Eastern producers currently budget minimum prices of between $70 and $80 a barrel, and that is unlikely to fall in the future. She predicted that the price of Brent Crude, a major benchmark, would rise to $150 next year and reach $200 a barrel during the next decade.

Increasingly, producers are forced to drill for heavy oils as light oil reserves run out, but recoverable deposits are well below identifiable reserves. Meanwhile, the production of alternative sources, such as shale (or kerogen) oil, still suffers from technological deficiencies and high costs.

Beaumont’s pessimism has been echoed by the normally sanguine International Energy Agency (IEA). In its World Energy Outlook 2010, the IEA said that it was most likely that conventional crude oil production would never again hit its all-time peak of 70 million barrels a day reached in 2006.