Saturday, October 11, 2014

Killing the peak oil story

The US has overtaken Saudi Arabia as a the worlds 's top energy producer. This is a major change in events which has been developing for years. The US and the rest of the world is still getting used to the new energy power in US production.

The US is awash in domestic oil and natural gas. This has destroyed the trade deficits and has changed everything from trade flows to the long-term direction of oil flows around the world. North Dakota, who would have thought,  is now challenging many of the OPEC producers as a major energy power. All this means is that there has been another bullet in the peak oil story that has been discussed on an off for the last two decades. The driver of the US energy story is the technology of getting it out of the ground and getting it to market.

When technology is improving there will be major change in the supply environment. There is a supply shock but not from geopolitical events, weather, or a logistics breakdown. Supply shocks can come in the form of increases in productivity. The shock will not hit the market immediately, but it can have a longer term impact than the headline shocks that we read about.

This just reinforces the old adage that "being long commodities is actually being short technology". Commodities is more about logistics, short-term disruptions in price from supply and demand shocks.

Nevertheless, there is a still the same oil game with new players. The issue is whether low cost producers will cut production or will they allow for further price declines to squeeze the high cost producers and allow for a new but lower price plateau.

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