Commodity supercycle in rude health despite shale – by Ambrose Evans-Pritchard (The Telegraph – July 31, 2013)

http://www.telegraph.co.uk/

The Oil Drum is closing down after eight years, giving up the long struggle to alert us all to “peak oil” and the dangers of an energy crunch. Readers have been drifting away. The theme has gone out of fashion, eclipsed by shale and fracking in the US.

The demise of Britain’s leading website for oil dissidents has been seized on by critics as an admission that peak oil is just another malthusian myth like so many before. It comes amid a spate of reports from global banks announcing the death of the commodity supercycle, slain by creative technology and a surge of new supply.

Yet if you stand back, it is hardly evident that the world is again enjoying abundant sources of cheap energy, metals or indeed food. Commodity prices have held up remarkably well given that we are in a global trade depression, albeit one contained by monetary stimulus.

The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13pc below the pre-Lehman peak. Average growth in the US has been 1.1pc over the past three quarters as it grapples with the most drastic fiscal tightening since demobilisation after the Korean War. The Economic Cycle Research Institute continues to insist that the US is in recession right now, a claim less absurd than it sounds.

Russia and Brazil have ground to a near halt. China is in its second “mini-recession” in two years, its growth rate near zero on a GDP deflator basis. China’s oil imports were down 1.4pc in June from a year earlier. Imports of iron ore were down 9.1pc.

It all adds up to a prostrate global economy, yet on Wednesday Brent crude oil was still trading at $106, and US crude at $103. There is no comparison with the collapse to $11 in 1998. The CRB commodities index is still three times higher than a decade ago. You might conclude that the supercycle is in rude good health given what has been thrown at it.

A new Eos report by the American Geophysical Union, “Peak Oil and Energy Independence: Myth and Reality”, argues that global crude output has been stuck on a plateau of around 75m barrels per day (bpd) since 2005 despite enticing returns. “Global net oil exports from oil-exporting countries have peaked and are in decline.”

The output of the big five oil majors – Exxon, BP, Total, Chevron and Shell – has fallen by 26pc over the past nine years, despite a relentless hunt for new fields. The North Sea, the Gulf of Mexico and Alaska are all wasting away. Expenses keep ratcheting up as fields move further out to sea in the Atlantic, drilling deeper through layers of salt. Theoretical reserves are meaningless. What matters is the break-even cost.

Eos said flows from the world’s existing fields are falling at 5pc a year, and it is questionable whether shale or tar sands can easily step into the breach. “Production from these unconventional sources is difficult and expensive, and has a very low energy return on investment. Simply stated, it takes energy to get energy,” it said.

Using a rule of thumb that 4pc global growth requires a rise in oil supply of 3pc, Eos concluded that the world will need another 17m bpd within five years unless we find a way to change our habits fast.

For the rest of this article, click here: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10214989/Commodity-supercycle-in-rude-health-despite-shale.html

 

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