Friday, February 23, 2007

Extended Futures

Just a quick thought: lots of non-conventional oil reserves and other alternative liquid fuel processes are claimed to be very possible and profitable--but only, companies say, if they can count on oil prices of at least $30, $40, or $50/gallon. This is really a red herring. Oil prices are currently over $60/barrel. NYMEX futures only trade out about 5 years, which is not a sufficient time frame to assure a profitable price when these alternative projects begin production (often a 7+ year lead in from funding to significant production). But this ignores that, while NYMEX may not trade futures out beyond 5 years, there is plenty of availability to sell forward contracts, even the potential to sell forward contracts on futures contracts. Airlines will gobble up all the forwards they can at $45/barrel for 2015--and so will almost any other industrial user with half a brain. So there is PLENTY of opportunity to lock in these high prices well into the future. Which makes one wonder why oil shale, tar sands, gas-to-liquid, and other non-conventional projects aren't proceeding ahead at breakneck pace. It doesn't matter if oil prices do plunge back to $10/barrel, since the profitability of these projects can be locked in for their lifetime with forwards sold today. There is NO REASON why these kind of locked-in 10%-20% returns should be passed up--they can even be repackaged and sold off for a huge gain right away, just as mortgages are.

Assuming, of course, that the technology works and isn't just being hyped. Time to put-up or shut-up.

4 comments:

Big Gav said...

Well (being reflexively contrarian here) - the other explanations are that (1) the oil companies don't believe in near term peak oil, or (2) they are happy enough for prices to soar and make even more money - possibly with environmental restrictions on exploiting tar or shale being lifted in a world with a liquid fuels deficit - the oil companies don't really have a big incentive to increase alternative supplies too quickly...

Jeff Vail said...

I agree that the big oil companies have a littany of disincentives to seriously pursue alternative fuels. However, I don't buy into the conspiracy theories that these big oil companies are also preventing the little players from seeking out the readily available venture capital in this sector and pursuing it. There's just too much private equity and VC available and rooting around for higher yields at the moment--which is why my (unspoken) assumption in this post is that the reality of the applicability of these alternative fuel technologies may be much less rosy than the hype.

It's a bit like my ethanol litmus test: show me an ethanol plant that heats its wort with ethanol, rather than natural gas or coal power...

Big Gav said...

I couldn't agree more on ethanol.

And I'm more than happy to agree that Shale oil is snake oil - I can't see any way it will ever be exploitable in significant quantities.

However tar sands and other heavy oils seem to be extractable in relatively vast quantities - and there is plenty of investment flowing in, from huge and smaller players, just not enough to make a real different to global supply at this point (which is the area my alternative theories were aimed at - though there are other physical constraints on ramping up Canadian production, for example, other than just availability of funds to invest).

GTL I'm less sure about but I'm not convinced it wouldn't be profitable - however I suspect the stuff will be more valuable as gas in the long run anyway.

Villette said...

Shale oil is not snake oil, snake oil has more value=)

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