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OIL PRICES Conventional oil reserves can be extracted for a cost of between $6 and $40 according to the International Energy Agency. The reserves of easy and cheap conventional oil are under pressure and will run out some day, the question is when? A range of conventional oil fields have been identified that have yet to be exploited and other conventional resources are under exploited. For example, Iraq has the third-largest reserves in the world but currently has a production capacity of about 2.5 million bbl/day. Experts have estimated that it could be brought up to 12 million bbl/day which is higher production than Saudi Arabia. The generally “alternative energy” friendly IEA (while down- playing the potential of Iraqi production) notes that these unexploited fields will typically just replace the loss in production of other maturing fields of conventional oil. But even if that is the case it will still provide a buffer for much of the current decade. So, should current futures prices be reflecting a potential transi- tion period a number of years down the road? There are also enormous reserves of somewhat harder and somewhat more expensive oil to be extracted once a higher base price of oil stabilizes. These reserves become profitable when the price of oil stabilizes in the $30 - $60 per bbl. range, though the initial start-up production costs in some cases are as high as $100 per barrel. These reserves include deep sea oil (with the appropri- ate oversight and monitoring); oil shale (oil trapped in rock and accessed through the maturing fracturing process), shale oil (the oil precursor kerogen trapped in rock requiring heat to process); tar sands; coal to liquids; gas to liquids; heavy oil; and arctic oil. Similarly, shale gas using the fracturing process has opened up tremendous reserves of that fuel source that could significantly offset oil consumption for transportation use, though with a range of potential environmental concerns that need to be researched. In fact, it is telling that investment in many of these alterna- tives is stagnant today, when we have recently seen prices peak at $147 and often run above $30 per barrel for extended periods. The reason is that the people looking to investments understand that such high prices are not reliable today and that those invest- ments are currently very risky. Where the demand side of the equation is concerned, opti- mism about an uninterrupted and sustained growth in fuel use in China, India and other developing nations tends to overlook the enormous uncertainties behind those assumptions. The current unrest in the Middle East, a projected growth region, highlights that in a very clear manner. The unrest could break positively for economic growth, or have the exact opposite effect. The economic/social disparity in China is enormous, creating a significant potential for future unrest. According to a March 7, 2011, article in China Daily, 150 million people live below the United Nations’ poverty line of one dollar a day. That represents about half the population of the United States. The article noted that the World’s Children report by the United Nations Children’s Fund placed China’s national income per capita in 2008 at $2,770, which is the same as, if not lower than, the average for all develop- 18 MAY 2011 | FUEL OIL NEWS | www.fueloilnews.com ing countries worldwide. People living on $1 a day are exposed to the growing middle and upper classes that have extraordinary wealth by comparison. And at the same time, many of the protec- tions and personal security the poorest Chinese enjoyed under the traditional Communist system—the Iron Rice Bowl—have disappeared. Will China be able to navigate what will invariably be a growing sense of class resentment? Similarly, the Chinese economy while touted to be an eco- nomic tiger by some economists and pundits is also seen as being shaky and questionable by other economists. Economically, the Chinese manufacturing-economy is cur- rently beholden to western consumption which is uncertain. And, as wealth expands in China, the manufacturing economy with all of its fixed costs is vulnerable to competitors that can produce cheaper. There are real estate bubbles. There is the cen- tralized government management which can at times be effective in handling crisis situations, but that breeds inefficiencies and corruption. On the practical side of things, the current growth in Chinese automobile ownership, and its concentration in specific urbanized areas, has already overwhelmed the transportation infrastructure. There have been recent traffic jams that are measured in days— not hours. As much as the affluent Chinese would like to own an automobile and enjoy an American-style open road, it simply might not be practical. Similar challenges exist in India and the rest of the projected high growth regions. So, as with supply, long-term demand pro- jections are not assured. And the glass on future oil supply and demand could very easily be half full as opposed to half empty. DOES SUPPLY AND DEMAND REFLECT TRADITIONAL METRICS? If the fundamentals are the divers of current prices, the prices should reflect traditional metrics and not just with crude but with refined products. Is that the case? A number of traders and analysts say that is not the case, including Dan Dicker. Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years’ experience. His recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts. He is currently finalizing a book on the issue of the markets driving oil prices titled: Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure our Economy. “We’ve seen this movie before, it’s not like we haven’t, and that’s why I wrote a book about it,” said Dicker. “We’ve seen this volatility-based, trader-based roller coaster ride with prices based not upon the fundamentals because you can’t argue to me that oil is fundamentally worth ($150) per barrel in July of 2008 and fundamentally at $33 per barrel in March of 2009. Supply and demand curves do not move that fast.” Dicker noted that a fundamental thesis is needed in order to get the investors and traders to jump into the game. “You