Black Gold's Peak Foreseen

Source: AME
Jun 01, 2006

Oil is often referred to as black gold: its economic value is immense. The Dubai Mercantile Exchange will be opening its doors in the fourth quarter of this year and will be listing Oman-backed physical crude oil futures.

A new benchmark (besides West Texas Intermediate and Brent) is being developed for the world: the first Middle Eastern sour crude futures contract. This development has arisen from the historic role that both Dubai and Oman have played in the benchmark pricing of Middle Eastern crude oil.

Dubai oil trading
DME (electronic based trading), a joint venture between New York Mercantile Exchange (NYMEX) and Tatweer (a member of Dubai Holding), will be established in the Dubai International Financial Centre and will provide the means of managing price and credit risk in a transparent and open market-place.

Energy products are becoming increasingly more important, and of all the separate products that can be traded (gas, power, freight), oil remains the most interesting.

Global oil discoveries peaked in the 1960s but are rapidly declining as oil becomes harder to find. Today there is a growing gap between oil discovery and production.

Oil is a finite resource and, although people in the know say that a global peak in oil production is imminent, I would remind you that this does not necessarily mean that oil prices will continue to rise.

First of all, short-term movements, each with its own magnitude and direction, are influenced by many input variables. Secondly, structural changes can occur; for example, the finding of technical solutions. For instance, until recently Saudi Arabia's oil reserves were 700 billion barrels.

If a new yet unperfected technique could increase that number by 200 billion barrels, the expected 900 billion barrels could not be called 'proven reserves'.

Proven reserves are reserves that can be extracted by using the techniques that are currently available and priced on current market prices. The expected 900 billion barrels are 'extractable reserves'; reserves that can be extracted once technological improvements (at reasonable prices) have been made.

Peak oil
In respect of proven reserves, Peak oil is not far away. Numbers vary but, on average, it is said that the peak will occur in about 40 years from now.

This peak could be postponed by 3 things:

1. Finding new reserves - which is becoming increasingly more difficult.

2. A rise in the recovery factory: rise in production. Only 30% of present oil is currently being produced; because of technical reasons, the rest remains below ground. Aramco recently claimed to have developed the technology to raise the recovery factor to 70%.

3. Substitution. Another aspect of technical development is that people are now able to create oil and ethanol (which can be mixed with regular fuel) from sugar, grain and palm oil. This development has already resulted in extreme price increases in these commodity classes.

Governments worldwide are supporting the production of (and durable production of) clean fuel. Global warming should be decreased by this initiative and in many European countries the mixing of bio-fuel with regular fuel will become compulsory.

Shell and Volkswagen have initiated a research project for the building of a factory in Europe to produce second-generation bio-ethanol from wood fibres. But oil remains black gold for the foreseeable future.