2008: Looking back

The year 2008 will always be remembered for quite a few things, not least of all for the turmoil in the global economy, particularly in the financial sector where giants like Lehman Brothers, Bear Stearns and others tumbled. The same year also saw the extreme gyrations in the spot oil markets which had far reaching impacts across the world. Today, we look at the top energy stories and related developments during the year that went by – events that will affect many aspects of the year ahead.


Unprecedented crude oil price volatility

During the early part of the year, crude oil rose to its highest ever price of almost $150 per barrel. Peak Oil was almost ready to provide an explanation for it when prices slipped into a four year low of around $30 driven by the economic slump. There are many reasons for this – the demand-supply gap , speculation, political risk, etc. As a consequence, there was a fair amount of economic particularly in transportation- the price of gasoline shot up effecting many consumers.

The price rise also contributed to the poor performance of the airline and automobile sectors. contributing to bankruptcy and consolidation of airlines while the automobile industry faced deep financial trouble when people stopped buying low mileage vehicles.. Later, when the oil price tumbled, some non integrated oil companies were affected adversely, particularly those that made large bets on alternative fuels. The retail side was also impacted, companies such as Flying J declared bankruptcy.


Renewable energy took off, but then didn’t

There was renewed interest and impetus in alternative and renewable sources of energy in 2008. This was one of the direct fallouts of the oil price spike in the middle of 2008. Consumers were increasingly looking for sustainable sources of energy. . The US presidential elections put additional spotlight on this issue and the newly elected president Barak Obama has put a major focus on an attempt to shift away from fossil fuel in the long term.

However the opportunistic investments in alternatives haven’t panned out in the short term. Despite production mandates and federal subsidies, ethanol producers are not minting any money. Falling crude and rising corn prices were deleterious to the effort. Renewable energy enthusiasts hit ground reality when second generation ethanol was delayed. Range Fuels, who intended to start producing by 2008 initially delayed to 2009 and now production isn’t forecast to begin until 2010.


Environment,Nature and Politics

Some major oil refineries had to be shut down because of hurricane Gustav followed by hurricane Ike in North America. Though the outages were short termed, many gas stations in the southeast ran out of gas, raising concerns about starting of something more widespread.

Somali pirates proved to be a major threat to oil vessels operating out of the oil rich African continent. Emboldened by recent ransom payments, they hijacked a Saudi supertanker carrying oil worth $100 million. Countries with interest in the continent have stepped up their maritime security in the area which has considerably brought down the number of such incidents.

Political maneuvering in certain hotspots also created short term demand instabilities. Nigeria, Iran and Venezuela continued to have internal upheavals. The end of the year saw some additional volatility in the Middle East and in gas transport issues between Russia and Ukraine.


Record profits by oil companies

Despite the steep fall in oil prices during the later part of the year, integrated oil companies made record profits with the help of high prices during the beginning of the year. Companies like Exxon Mobil posted biggest profit in history during the same year when downstream profits in refining fell along with gasoline consumption.

OPEC went ahead with its big production cut to counter flagging demands, followed by lowered production in other countries like Russia and Mexico. The results are not visible yet, but many hope this together with a recovering economy will stabilize the oil prices in the near future.

Busting some myths

There has been a fair amount of discussion about energy policies in the recent past, aided in no small part by the interest generated in the recently concluded U.S. presidential election. Some facts that were thrown about has been taken as received wisdom. We examine some of these here.

1. Oil companies are extracting extra “economic rents” for the high price of gasoline/petrol

There are many factors that resulted in the run up of gasoline price. About 70-75% of the price is that of crude and refining/distribution/service station charges. The government taxes comprises of 10-15% depending on regulatory regimes. At the end of the day, Oil and Gas companies earn about 5-10% as profit.
There are also several additional factors that impact the price at the pump- cost of exploration and development, cost of extraction (the cost of human services as part of this is another story- more on this in another post), refining cost (no new refineries have been commissioned in the US in the past 17 years). I also think that the cost of speculation was a big factor- note the rapid decline in price in the last two months as many margin call positions were liquidated in the oil futures markets.

2. Oil companies are not investing in alternative energies.

The U.S. oil and natural gas industry invested almost $100 billion between 2000 and 2005 in emerging energy technologies, including $12 billion in non-hydrocarbons and $42 billion in greenhouse gas emission mitigation technologies from 2000 to 2006. This is not mere green PR, but real investments.
There have also been some advances in less intrusive technologies for exploration and production. However, the industry has successfully developed breakthrough technologies like 4D seismic imaging and multi-directional drilling, which have helped reduce the industry’s environmental footprint dramatically. Today it is possible to develop nearly 80 square miles of area below the surface from a single two-acre site on the surface.