Heavy Truck Technology - A Sure Thing Prediction.
An Attempt to Clear Away the Oil/Energy Fog
Panic is never pretty ... and $100 barrels of oil are exhibit ‘A’.
While I don’t think the Robber Barons of OPEC will be any more effective at price fixing over time than any other cartel historically has been (they all fall prey to human psychology), I do think that there is a long term concern.
This is why I think there is one technology area above all others important for the future of the heavy duty truck business ...fuel conservation. Assume the following (these numbers come from IEA/WEO reports):
The demand pattern looks like this:
It looks simple ... and on the surface, it looks like its good to be an OPEC provider.
However, I feel that commodity speculation coupled with low spare capacity both upstream and downstream has been the primary contributor to tightness in the market. Here are the underlying facts:
- Based on several industry and academic estimates, non-OPEC production will peak in 2015, falling off precipitously after that due to lack of investment in ‘difficult’ oil recovery (very deep drilling, Venezuelan oil sands, etc.) and exhaustion of existing fields.
- OPEC production capacity hasn't effectively changed in 40 yrs. One notable finding which emerges from our analysis shows that, based on major investment committed to upstream projects, effective surplus capacity should still not increase meaningfully until 2011.
- Currently, only Saudi Arabia of the major OPEC members has any substantial available capacity in place. Field development is a 4-6 year proposition, roughly the time necessary to build a good sized refinery... not counting the 5-year minimum necessary for government permitting in the US.
- On the plus side, the ‘rigs-in-use’ count has risen by 45% in the last three years (the upside of price spikes). Lifting costs (costs to get a barrel to the surface) are still well below $10 per barrel ($5 in Saudi!). Even in tough situations like Canadian oil sands, it is still less than $30.
- Much of any anticipated supply increase comes from recently announced OPEC investments to expand crude and natural gas liquids. Preliminary analysis also suggests that product supplies should increase, reflecting increased capacity and growth in biofuels.
- One important element that is not addressed in our medium-term review is crude quality, an issue that may have significant implications for the availability and affordability of hybrid oil/additive fuel and lubricant products.
- Foodstuff based ethanol (the current darling of alternative fuel cheerleaders) is not economically viable. This is so far out of balance, and the problems with the concept are so profound, it really deserves to be discussed separately.
The biggest and most intractable problems may end up being political. The proved reserves worldwide have risen 12% in the past ten years, according to the British Petroleum (BP) annual report.
There is abundant supply in inventory above ground today ... just not in the US. According to the US Energy Information Agency, in-tank worldwide inventory is at an all-time record... so we currently are suffering from lousy inventory control more than actual shortage.
At the same time, US demand actually dropped 1.5% in 2006. According to an analyst’s report by Exxon Mobil, this oil giant has actually cut back on its long term forecast for oil consumption.
Tragically (for their citizens), OPEC and other producer nations that have the oil will not deal with most western companies that have the state of the art deep well exploration and production technology.
And this to the instability of Saudi Arabia and the push toward nationalizing non-OPEC resources and you can get the sense of the immediacy of the need for conservation technology.
One last political effect note... the oil price spike has really little to do with US dollar valuation... a commonly blamed suspect. As the dollar recently slid about 10% against a currency ‘basket’, oil prices rose nearly 40%.
In the short term, its not basic supply/demand economics ... it’s not the dollar... it’s not Iraq. Today’s spike is as muck commodity speculation as anything.
And we know what happens to speculative bubbles!
Still, for the heavy duty truck business, fuel conservation will not be merely a question of price... it will soon be a question of economic survival. No need to panic, but it is certainly a good time to move quickly in all areas of fuel efficiency.
