The Less Bullish Case for Oil

Everyone, I think, is fully conversant with the bullish case for oil prices — emerging market demand growth, plus peaking supply, plus higher extraction costs, plus declining discoveries — but it’s always useful to read the less bullish case. Admittedly, this take from Edward Morse of LCM isn’t exactly bearish, but it’s considerably more sanguine.

The disappearance of spare Saudi production capacity was the most critical element in driving up prices from 2003 to 2008—and its reemergence should be the most critical element in keeping them low over the next three years (or more, if global demand fails to rebound enough). Saudi Arabia wants spare production capacity for multiple reasons, including, importantly, to give it influence in the g-20 (the group of finance ministers and central-bank governors from the leading economies) and other international forums. Riyadh’s ability to increase production is the key to its being taken seriously.

…If there was an obstacle, it was not a lack of hydrocarbon reserves— deep-water resources appear to be even more abundant than was thought a decade ago—but a lack of equipment to discover and produce them. Fewer than two dozen drilling vessels (each costing $1 billion) were available in 2000. But as contracts were put in place at the time of very high oil prices, the fleet of vessels started to expand. By 2012, there should be closer to 150 such units available for finding and developing deep-water resources.

More here.