Oil Prices and Global Exports

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I came across the material in a newsletter from John Mauldin; I've attached a PDF for the entire piece. It presents some ideas about why oil prices may go up a great deal more, and rapidly. It also mentions the implications for Mexico which may be of interest.

Below are a few brief excerpts which will, hopefully, whet your appetite for more.

First the good news:

As a quick aside, if we would start a project to build a massive nuclear infrastructure, such as in France, which
produces 80% of its energy from nuclear, while at the same time pushing ahead in a Manhattan-type project the
development of electric cars (or some hybrid), we could reduce our dependence on foreign oil and lower travel
costs by the middle to the end of the next decade. And the environment would be cleaner and safer.

Now some of the challenges:

At the time the North Sea peaked in 1999, the U.K. was exporting 1 million barrels of oil per day. By August
2004, it had become a net importer. What happened to cause the situation to turn around so quickly?

As you can see, for illustrative purposes the ELM assumes that, after a country's oil production hits peak it will
decline at a rate 5% annually, at the same time that local consumption increases by 2.5%. The dotted red line
then shows the impact those two metrics will have on the ability of the country to export its excess production.
Using these assumptions, the ELM shows that exports reach zero in 9 years.


Rather it is that the global market is now deprived of those exports; between UK and Indonesia alone, the
change over just the last decade amounts to a swing in the wrong direction of a total of 2 million barrels per day.
And those are just two of a number of important countries which have swung from exporters to importers in
recent years.

This is what is creating so much international competition for the remaining supplies of oil. And why the trend to
higher energy prices is so well entrenched. And if the ELM is right, things are about to get far worse ... far sooner
than most people expect.

Here's a key point:

But here's the thing. Using straightforward ELM calculations, Jeffrey Brown is confident that Mexico will ship its
last barrel of oil to the United States -- or anywhere else, for that matter -- about 6 years from now, in 2014. In a
recent interview with Brown, I asked about this forecast.

"Mexico was consuming half of their production at peak in 2004. And if you look at the '05, '06, '07 data, they're
basically on track, on average, to approach zero net oil exports no later than 2014," he confirmed.

Of course, the US is completely unprepared to replace this source of oil, especially considering the growing
stresses on global oil supplies causing by ballooning demand from emerging markets. That means the
international competition for available supplies is only going to get more desperate in the months and years
ahead.

What will this mean to oil prices, according to Brown?

"From this point out I think we'll see a geometric progression in prices ... you know, $50, $100, $200, $400,
whatever. The only question now is how short the periods will be between prices doubling again."



The trend for sustained higher energy prices appears solidly in motion. If Brown and the ELM are correct, energy
prices will double, then double again.

Even if he is wrong and prices don't rise geometrically, the global dogfight to replace declining supplies -
decidedly exacerbated by the loss of Mexican and maybe Russian (and ??) exports in the near future - is going
to get ugly and expensive.

It looks as if we will experience interesting times.