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Editorial comment

Usually when one sits down to write the first editorial comment of the year, it is an opportunity to make extravagant predictions about the year ahead in the hope that no one will ever bother to check your powers of divination at a later date.


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Usually when one sits down to write the first editorial comment of the year, it is an opportunity to make extravagant predictions about the year ahead in the hope that no one will ever bother to check your powers of divination at a later date. However, after the extraordinary vicissitudes of 2008, which saw the price of crude soar to US$ 147 before tumbling to below US$ 40, I feel that making any kind of prediction for 2009 would in all probability be unwise. Instead, I will try to stick to what we do know and talk in general terms. Certainly, 2009 looks set to be a year of adjustment to what appears to be a radically changed world. It was not just the uncertainty caused by the fluctuating crude oil price, but a host of other events that also made 2008 a watershed year. Not least of which where the election of Barack Obama, the first black US president, the Russian- Georgian War, which reasserted the Russian ‘zone of influence’ and perhaps most crucially of all, the collapse of Lehman Brothers on 15th September. This event, unthinkable until it actually happened, truly heralded the moment when the ‘credit crunch’ crunched. Since this trigger point, we have seen the bailout of major global financial institutions, the collapse of investment banks, the slashing of interest rates across the globe, some of the world’s largest companies on the very brink of bankruptcy and the spectre of rising unemployment throughout the developed world.

The unfolding of the current crisis is by no means at an end and will be played out during the course of 2009 and quite possibly beyond, with further shocks more than likely. For the commodities sector, the question still remains as to whether the super-cycle, as witnessed over the course of the last 10 years is truly at an end or whether we are merely experiencing a blip along the way?

Opinion would appear to be divided with many financial analysts optimistic that the sudden plunge in commodity prices, from copper to cotton and including oil, is merely a market correction, or ‘reset’, and that the upward trend will once again continue. They argue that the fundaments have not changed.

Supply of essential commodities remains constrained due to a lack of investment over the course of the last 20 years and huge demand from emerging economies. They believe that this situation will only be exacerbated by the credit crunch as countries hold back on essential oilfield or other investments leading to further supply shortages in the future. Opponents of this view, including the World Bank, argue that the commodities boom is at an end. This boom was indeed a super-cycle but history dictates that all booms inevitably lead to a period of bust. They see a weakening in global economic growth, including the emerging economies, already being witnessed in China, and therefore a significant softening in commodities demand. Any significant cancelled investments in new projects they suggest will be more than offset by the effects of the recession, leading conversely to excess capacity in the system.

Regardless of which view is correct for the commodities market in general, it is clear that for the oil and gas industry, the current weakness in crude prices is a serious concern. It is widely accepted that a crude price in the range of US$ 70 - 80 per barrel is necessary to sustain investment in conventional and nonconventional production as well as make research into alternative energy sources viable. Already, project delays and cancellations are evident across both the upstream and downstream oil and gas industry, as are cost cutting measures including job losses. However, the global economy will recover, whether this is in 2009 or not is immaterial. A recovery will mean a growth in demand that will inevitably lead to soaring crude prices if the investment in correcting declining output from existing resources and the development of new resources is not undertaken now. If this fundamental requirement is overlooked, then crude at US$ 147 and US gasoline at US$ 4 a gallon may look very reasonable indeed in the years ahead. To this end, Hydrocarbon Engineering welcomes the timely announcement that ExxonMobil plans to invest US$ 1 billion in expanding the capacities of three of its refineries, two in the US and one in Belgium (see World News page 6).


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