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Mulva on Replacing Oil

My former CEO Jim Mulva spoke today at the National Summit in Detroit, and had some newsworthy comments. Bloomberg reported on his talk:

Conoco Chief Says Replacing Oil May Take a Century

June 16 (Bloomberg) — ConocoPhillips, the third-largest U.S. oil company, said it may take a century for the nation to replace fossil fuels with alternative energy sources.

I don’t know of too many people who think we have a century’s worth of oil left. Natural gas and coal? I also seriously doubt we have that much of either of those, especially allowing for economic growth. What I think this means – in any case – is that we have some potentially difficult times in front of us. However, Mulva went on to give his prescription for preempting some of those difficulties:

The country will need to develop its own oil and natural- gas deposits and continue importing petroleum while developing alternative supplies in the decades ahead, ConocoPhillips Chief Executive Officer Jim Mulva said today at the National Summit economic conference in Detroit. At the same time, he said, the nation will need to address climate change.

On the issue of climate change, Mulva thinks legislation is likely, but doesn’t want to see U.S. producers punished while foreign producers are left unscathed:

The U.S. needs policy that encourages investments in all types of energy and avoids hurting the economy by making the nation less competitive than countries with cheaper energy, Mulva said. Proposed climate legislation in Congress threatens to drive U.S. refiners out of business by imposing higher carbon costs on domestic fuel than on imports, he said.

That last bit is very important. If we do get climate legislation, we need to make sure that we aren’t providing a competitive advantage to countries who don’t care about emissions – while putting our domestic producers out of business. This was a major theme in Jeff Rubin’s book Why Your World Is About to Get a Whole Lot Smaller. Rubin argued that if we put a price on carbon emissions in the U.S. we can apply a carbon tariff on imports to level the playing field. Rubin argues that this will encourage efficiency from foreign producers of all things that are energy intensive, and it will ensure that the legislation doesn’t put U.S. firms out of business. (I reviewed Rubin’s book here).

Mulva went on to suggest that oil prices had gotten ahead of themselves. That story from Reuters:

Conoco CEO: oil prices ahead of fundamentals

“We have felt that an oil price between $70 and $80 (a barrel) is a good balance to promote investment, continue to replace reserves and keep production up, as well as a balance with respect to the cost to the consumer,” he told Reuters.

But Mulva also acknowledged the price run-up — expectations of a recovery drove crude prices to $73 a barrel last week, more than double their winter lows — was “stronger than we would have expected” and was “a little bit ahead of the actual supply and demand situation and inventory levels.”

I think “expectations” is the key word here. We do seem to have a little bit of a glut of oil (and natural gas) right now. In that respect, prices seem to be too high. But take this story from Fortune, where a majority of analysts believe that prices long-term are headed much higher:

Why oil is on the rise again

NEW YORK (Fortune) — Ask a group of oil analysts about the recent surge in crude costs and here’s the consensus answer you’ll get: Prices have run up too far, too fast and they aren’t supported by the fundamentals.

Ask them about where prices will be two years from now, however, and the majority will offer this prediction: A lot higher.

So if I am an investor – and I think oil prices will be “a lot higher” in two years – I am going to invest in oil and/or oil company stocks regardless of what the supply/demand situation looks like today. And when enough people do that, you have pressure on oil prices today, which is why I think we are back to $70 oil.

Full Disclosure:
I own shares of ConocoPhillips and Petrobras.

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June 16, 2009 - Posted by | carbon tax, climate change, ConocoPhillips, COP, global warming, investing, Jeff Rubin, Jim Mulva

11 Comments

  1. I think I read somewhere that we, Americans, use something like 3 gallons of petroleum products/day, whereas our 2.5 Billion Chinese, and Indian brothers get by on 0.25 gal/day (or, some similar number.) Well, those 2.5 Billion Chinese, and Indians, are smart, hardworking, and getting better organized. They're not going to settle for the "child's portion" much longer. It's getting hard to find anyone of consequence that thinks we're ever going to produce substantially more oil than we did in 2008. I'm a strong ethanol supporter, but I'm on record going back to 2005 that I wouldn't invest in the ethanol industry with counterfeit money. There's just too many things that make it a bad investment. Oil, on the other hand, seems to me to be a Wonderful investment. I wouldn't sleep too badly knowing every dime I have is invested in a handful of Major Oil Companies (Producers, NOT refiners.)

    Comment by rufus | June 16, 2009

  2. Do we have 100 years? We know that governments around the world will collapse long before that under the weight of their Ponzi pension & health care schemes — but the Political Class is not doing anything about that either.A guy from Shell made a presentation at the AAPG (geologist) conference recently — usual buzz words about the alleged Anthropogenic Global Warming scam, but the prediction was that coal use would continue to grow strongly, while oil use stabilizes or declines. By about 2030, we will be back to the days of King Coal, with coal providing more energy than oil (for about the first time since the 1960s).Oh Brave New World!

    Comment by Kinuachdrach | June 17, 2009

  3. Ben.Go back to last entry of previous post. Energy situation is in turmoil. Beginning of the end of the so-called oil age.It was in really and in truth, the Electrical Age (which will continue). Electrical lighting (which replaced natural gas lamps and kerosene and whale oil.)Electric motors which control the robots that build gasoline powered vehicles. The electric motor which powers most of our industrial processes.The electric motor which provides you with ceiling fans, air conditioning, refrigerators, dishwashers, hair dryers, electric tools, lighting and personal computers, cell phones and digital camera batteries. The list goes on… and on….Last time I poured a quart of motor oil into my computer. It stopped working.The oil age ? – A misnomer to say the least.Electricity is our "true renewable", simply because we have so many ways to make it.John

    Comment by Anonymous | June 17, 2009

  4. The political class has for the most part rationalized away the concerns by putting faith that some else will figure it out on their watch. To project a difficult problem that tells the public that the hope and visions they have for the future needs to change to some thing less is political suicide. It's easier for them to just wish it away, to deny the issue.I have taken my lumps trying to get many of them to open their eyes and lead the way. I'll keep at it.Terry Backer CT State Representative

    Comment by terry | June 17, 2009

  5. Hi Terry,Thanks for stopping by. I was just talking to Nate Hagens today about the ASPO conference last year. It was good visiting with you there. Keep fighting the good fight.Cheers, RR

    Comment by Robert Rapier | June 17, 2009

  6. "To project a difficult problem that tells the public that the hope and visions they have for the future needs to change to some thing less is political suicide."With great respect, Rep. Backer, it sounds like you are a victim of false doctrine.There is no need to go back to less — we can use technology to go forward to more, much more!We can scale up using existing nuclear fission technology, keep electricity flowing, and mine liquid transportation fuels from tar sands & oil shale. We have the resources to do this for one or two millenia. During that time, we can raise the living standards of the entire human race, and devote major resources to finding the next energy source for the post-fossil, post-nuclear age.Or rather, we could do all that — if we had a Political Class that had understanding, vision, and humility. But maybe we have the Political Class we deserve.

    Comment by Kinuachdrach | June 17, 2009

  7. I don't know why Mulva thinks we have only a few decades of NG supplies.Read this: "The United States has over 100 years worth of natural gas supplies, and forecasters have consistently low-balled the amount of the clean-burning fuel trapped in unconventional places like shale rock, an industry group said on Wednesday.Total U.S. recoverable supplies amount to 2,247 trillion cubic feet, or 118 years worth of supply at current production levels, according to a report funded by the American Clean Skies Foundation and completed by Navigant Consulting Inc.The foundation is chaired by Aubrey McClendon, the outspoken chief executive of Chesapeake Energy Corp, the third-largest U.S. natural gas producer."Okay, so McClendon, who is in a senior position in the NG industry, says we have 118 years. I would say this NG picture (which I understand will likely be duplicated globally, through discovery and development) completely undercuts doom scenarios. Ships and motor vehicles can run on NG. Why all the doom-mongering, when we have this option? Oil may remain a high-prcied "luxury" fuel, and so perhaps the oil industry will thrive.A hopeful note to Kinu: Try reading up on President Lincoln, and what he faced when he got to D.C. Or the horrid drama that FDR faced. We can prevail, and we must.

    Comment by Benny "Boom, No Doom" Cole | June 17, 2009

  8. EIA US Coal Reserves, May 2009 In the United States, coal resources are larger than remaining natural gas and oil resources. Annually, EIA reports remaining tons of coal in the demonstrated reserve base (DRB), which is a subset of total coal resources that have been mapped to measured and indicated degrees of accuracy and found at depths and in coalbed thicknesses considered technologcially minable at the time of determination. As of January 1, 2008, the DRB was estimated to contain 489 billion short tons (a short ton is a unit of weight equal to 2,000 pounds). The U.S. uses just over a billion short tons of coal each year.Bottom line: ~480 years worth at current rates, assuming no more reserves are discovered and no improvement in mining extraction rates.

    Comment by LarryD | June 17, 2009

  9. I don't know of too many people who think we have a century's worth of oil left.Oh, come now! Of course we will have oil a 100 years from now. The question is how much oil, and at what cost. As I've stated before, until the price starts to hurt, there is no real incentive to get innovative. It will work again.With all due respect, Rep. Backer, I think the problem is US politics (as in many other countries) involves too many lawyers, and too few engineers.To a lawyer, you almost never get to the point where you concede. Lost your case? Go on to appeal. Lost the appeal? Appeal to a higher court. On and on. Unless you are really unlucky (or have a really bad case) you at least have some victories along the way, which you use to prove that you were right all the way. A lawyer is best regarded if he never-ever changes his mind. Does that sound like current political leadership or what?To an engineer, there is such a thing as the underlying reality, the fundamental truth. When you get on the wrong side of that, you're better off to concede and move on.Unfortunately, engineering schools have encouraged a separation of the engineering student from the larger student body, to the point where engineers only speak geek and, in the view of non-technical personnel, get all irritable and irrational ("Trust me. I know what I'm doing!" & "You won't understand!"). Exhibit A: our friend Kit.You need engineers in leadership: it was engineers who started the Detroit auto companies, and accountants who ran them into the ground, to generalize.It takes an engineer to understand and respond to the energy challenges that the US now faces. And to take us beyond the twin idiot ideologies of drill, baby, drill and super profit tax on Big Oil.

    Comment by Optimist | June 17, 2009

  10. It seems to me that if future oil is expected to be more expensive than current then people would store oil now to sell at the future price, which would explain high inventories despite the recent rally. A prime mechanism would be the futures market, though forwards could also work. In the futures you'd buy oil now and sell a far-dated futures, and probably protect the whole thing with an option (to avoid a margin call). The contango in the futures would be doing what it is supposed to do — encourage storing a commodity for later use. But at the same time this would reduce the amount coming to market now, therefore bolstering near-term prices. Because of this kind of physical-futures arbitrage possibility, something that's being done a lot now, I don't understand or agree with the notion that futures prices don't affect cash prices (no matter how much I may like Paul Krugman in other regards). Any ideas?

    Comment by Mallory Margueron | June 18, 2009


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