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2. ASPO-Ireland's Depletion Model

The May issue of ASPO-Irelands monthly newsletter contains a significant revision to the organizations oil depletion model. The last major change to the model, made in 2005, indicated that worldwide production of all liquids was most likely to peak in 2010. At that time, the date was pushed ahead to 2010 because of the likelihood that significant new quantities of oil would go into production and that this would keep the worlds oil supply growing.

The new model takes into consideration that producing large quantities of oil from deepwater sources is not going to be as easy as originally thought and certainly not similar to producing oil from land or shallow water. Technical difficulties in producing deepwater oil has already delayed major projects and the cost and availability of deep water drilling rigs is likely to a limiting factor determining how fast the oil can be exploited. The effect of this change is to move ASPO-Irelands year of maximum oil production back from 2010 to 2007.

ASPO points out that there is also some good news in that deepwater production will ultimately be 85 billion barrels rather than the 68 billion previously estimated which will make the downside of world oil production occur more slowly and the peak a more gentle curve.

3. The Goldman Sachs Forecast

In a report dated May 5th, a team of Goldman Sachs analysts wrote "The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.'' As this was the group that forecast in 2005 that there could be a "super spike" that might send oil all the way to $105 a barrel before 2009, the report immediately attracted much attention.

As crude has climbed by nearly $50 a barrel since last fall, the possibility of another $30 - $80 increase within two years no longer seems far fetched. As a gallon of crude increases by 24 cents for every $10 increase in a barrel, an $80 increase would force up US gasoline prices to the vicinity of $6-$7 a gallon. The real unknown here is what $6+ gasoline would do to consumption in the US. To the surprise of many, close to $4 gasoline so far seems to have had minimal impact and the Europeans, albeit with more efficient cars and shorter trips, continue to consume gasoline and diesel at considerably higher prices.

It is clear that the current housing and banking crisis still has many months to play out. What happens to the interaction among the dollar, GDP, inflation, and the USs trading partners over the next two years is simply too much to foresee. As a commodity second only to food in utility, the demand for oil is likely to remain strong since substantial surpluses are unlikely to emerge again.

4. Brazil's Deepwater Discovery

When Petrobras announced that they had discovered a significant quantity of deepwater oil variously said to be anywhere from 8 to 33 billion barrels, the conventional wisdom in the oil industry was that it would take five or six years before production could start and additional years before large scale production could occur. Knowledgeable observers spoke of the troubles other oil companies had experienced in attempting to extract oil from great depths extremely high temperatures, destroyed drill bits, cracked metal and opined that the Brazilians would be faced with the same problems.

Much to the industrys surprise, last week Petrobras said that at least the Tupi field would be easier to exploit than predicted as it was only 4.4 miles below the surface rather than the 6 miles the company was talking about last fall. Petrobras CEO told an interviewer that, "I don't think we face any technical challenges that are insurmountableWe think that today the main problem is cost reduction, not availability of technology.'' He said Petrobras already has the technology to cope with temperatures reaching 60 degrees Celsius expected to be found in the deposit. Others including the USs EIA had suggested that temperatures could reach 260 degrees C.