The Synergies of Energy

It's been a memorable week for energy markets, starting last Friday when oil hit a new all-time intraday high of $139.12, surging $10.75 in just one day.


Seven days later, oil is trading at the $136 level. That's 31 percent above its inflation-adjusted record high price of US$104.36 (in April dollars), set in April 1980. Oil is up 42.5 percent year-to-date and up 102.1 percent from 52 weeks ago. And Goldman Sachs is predicting that oil will hit the $150 level sometime this summer.

The surging energy prices have caused great anguish for many Asian governments. Consumers in this region have been shielded to a large extent from soaring crude oil prices by government subsidies. But all that's changing. Taiwan, Sri Lanka, Bangladesh and Indonesia have been forced to review their subsidy policies. And both India and Malaysia did the unthinkable and hiked fuel prices.


Speaking at the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur, Malaysia's Prime Minister Abdullah Badawi aptly summed it up saying, "It was a difficult and agonizing decision to make. Many times, we have been tempted to walk away from such a difficult decision. Certainly, we realized that the decision would be met with great anguish not to mention anger from the people."

Market watchers, traders, analysts and policymakers alike, have been trying to figure out why oil prices are, where they are. Theories abound including speculation, rising Asian demand and supply problems, just to name a few.

Speculation Inflating The Bubble?

Fereidun Fesharaki of FACTS Global Energy Group thinks the markets have been more irrational than it has ever been in its history. "It is absolutely unprecedented and simply cannot stand ... since the price hit $105, everything above $105 is speculation. Something like $50 – $100 billion has poured into the market the last two months", Fesharaki says.

CNBC contributor Daryl Guppy of guppytraders.com in his column Charting Asia, adds that, "The disconnect between oil prices and fundamentals is a disturbing bubble ... analysis of the duration of open interest by fund managers 'investing' in the commodity market suggests this is the gas inflating the bubble."

But others don't see the speculative factor as being that extreme in the ramp up of oil prices. Tan Sri Mohd Hassan Marican, the CEO of Malaysia's Petronas told CNBC he thinks there's only about a $15 element in the price of oil that's due to speculation.

Red Hot Asian Demand

And what of Asian demand? Will it play a continuing role in boosting energy prices? The bears think not. Demand looks like it could weaken in the wake of the price hikes, plus the U.S. dollar seems to be on a firmer note after Bernanke's warning on inflation.

"Already, the Asian tigers have become Asian pussy cats. So what this does is it reinforces the same and makes it difficult for demand to go up," FACTS Global Energy's Fesharaki says. "We don't have much growth in Asia. Maybe 600,000 to 700,000 barrels a day, 800,000 at most – compared with the 1.2/1.3 million barrels that we had before," he adds.

Others disagree. Petronas' Hassan points to the middle income group in China and India which is growing. We're talking about millions of people who want to make the transition from a rural to urban lifestyle. This transition is going to require huge amounts of energy.

Tough Supply Lines

All this talk of demand, but what about the supply side factor? It seems to be the consensus that it's not about the availability of the hydrocarbons that's in question, but rather, the ability to extract these hydrocarbons.

According to BP's research, there's nearly 42 years of oil reserves left in the ground and 60 years of natural gas. Group chief executive Tony Hayward told AOGC delegates that while we've already produced around one trillion barrels of conventional oil, there's another one trillion barrels of proven reserves and another trillion of non-proven resources.

Greg Hill, executive vice president (Asia Pacific) of Shell Exploration & Production qualifies this view. "We believe at Shell, that conventional easy oil and gas is probably nearing its peak. So I think the peak is emerging. Having said that, there's still an awful lot of hydrocarbons to play for," Hill said.

But those hydrocarbons he's talking about, are hard-to-get pockets of energy located in countries like Nigeria and Iran where geopolitics comes into play, or are in deeper water, or trapped in difficult rocks like oil shale or oil sands, or under ice -- which brings up the environment/conservation factor.

Energy Vs. Environment

One of the most controversial issues involving energy resource is the question of whether to allow drilling for oil in the Artic National Wildlife Refuge, located east of Prudhoe Bay in Alaska's "North Slope," which is North America's largest oil field. Environmentalists and many within the Democratic Party are vehemently opposed to any sort of exploration in the refuge. They have successfully prevented drilling through legislative filibusters, amendments, and vetoes.

However, James Slutz, acting principal deputy assistant secretary with the Department of Energy thinks the refuge could be effectively developed in an environmentally responsible way. "While it would take some years to do so, peak production would be almost 1 million barrels a year, that’s what's being projected. We think it would make a lot of sense and is the right thing to do," Slutz said.

It's clear from this crude snapshot of oil issues that the synergies of energy are far-reaching, complex and multilayered. There are many more factors that haven't been discussed here such as OPEC's role in price stabilization and the idea of peak oil.

One thing is certain, as oil prices surge upwards and gasoline prices push past $4 a gallon, consumers are being forced to change their habits. People are now looking to purchase fuel-efficient cars like the Toyota Prius with gas-guzzling SUVs falling out of favor. Usage of public transport systems around the world has jumped. Some folks have even taken to cycling to the office.